Vince v Osborne – the battle for RBS’s future

The future of the Royal Bank of Scotland is back in the headlines today.

The Financial Times reports that ministers are discussing buying the remaining shares in RBS, bringing it fully under state control. This would allow them to force it to lend more to viable small and medium-sized businesses  without having to worry about other shareholders challenging such a direction in the courts.

The Guardian reports that Liberal Democrat   Vince Cable is the driving force behind this plan. He believes that it’s the only way to get money to businesses.

What we do know, and Vince Cable confirmed when taking questions from Liberal Democrat members in Edinburgh last week, is that the continuing failure of banks to provide viable businesses with the cash flow they need to survive is one of the most serious threats to economic recovery. Vince said:

Businesses are being throttled from lack of credit.

At that meeting he said that the Government was a long way from deciding what to do with RBS, but that agreement had been reached with the Tories that the retail banks would be split off from the risk taking investment “casino” banks.

The FT article points out that nationalisation would be fraught with complications and may breach European law.

The Government needs to get money out to businesses so they can create the jobs to bring in the taxes to tackle the deficit. With little progress not far off half way through its term, it will need to come up with a solution soon. Nothing the Chancellor has tried so far to boost lending has worked and the case for more radical action is compelling given the rate at which the economy continues to contract.

Evidence that the remaining shareholders are the barrier to providing the lending business needs would  surely make the case for nationalisation compelling in this current climate.

* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings

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  • Richard Dean 2nd Aug '12 - 3:19pm

    First reactions again, sorry! Perhaps “does not seem to understand risk” would have been more polite than “is an idiot”!

  • Banks lend when they *think* potential profit exceeds the risk, and they are by no means infallible when it comes to deciding when this is the case. In a time when confidence is so low, a business that would ordinarily be a perfectly good investment is turned down as bankers become more risk averse. Businesses that are on paper perfectly sound end up going under because of this crisis of confidence and the recession is entrenched, each subsequent failure acting to confirm bankers’ fear that now is not the time to lend.

    A state bank ‘picking winners’ will obviously make a lot of loans that end up going bad and resulting in bankruptcies down the line. But if the idea works then those state investments that have only postponed failure will become isolated failures occurring against a backdrop of wider economic recovery and growth, rather than confirmation of a self-reinforcing downward trend. And you never know, some of it might even be successful.

  • Liberal Eye – I think you are correct on this one. The banks did not have the “human infrastructure” before the crash, and I have not reason to think they have improved their position.

    Before the crash I had need to seek small business finance of 100K and went to 4 High Street banks. Three asked for business plans and accounts for central “business units”. All offered similar deals with a high rate of interest, large fees, and demanded a charge over my house. The fourth asked for advanced information and sent a person to see what we wanted to do, how the money would be spent, and offered the lowest rate of interest, the lowest fee and did not ask for a charge over my house.
    The three banks went bust. The one which lent us the money did not need a bailout.
    And the business ? It is still trading with a steady profit.

    Banks like any business want to maximise their profits. They do it by lending at the highest rates, charging the biggest fees they can get away with and minimising the downside. If they do not understand what they are doing they make mistakes and lend to the wrong customers. Or diverting funds from solid boring business to speculation. The Vickers Report should be acted on. Sadly Osbourne does not agree – I judge him by his actions not his words.

  • Richard Dean 2nd Aug '12 - 9:20pm

    If banks have lost the relevant human capital, then why would RBS be different? And why isn’t Vince developing programs to restore that capital?

    First the problem is that firms have cash mountains. Next the problem is that firms need loans that they can’t get. When will this government stip blaming someone else for their errors? If I had money now, I would have virtually no incentive to risk it on developing a business. The risk of losing the lot is worse than the certainly of losing a small amount through small inflation. The same is true if I had no money but collateralisable assets.

  • If I had money now, I would have virtually no incentive to risk it on developing a business. The risk of losing the lot is worse than the certainly of losing a small amount through small inflation.

    Very true on an individual level, but the trouble is that if everyone follows that logic and sits on their money until the economy improves, it never will improve and we’ll be stuck in Japanese-style stagnation until someone takes a risk with their money.

    Obviously, private individuals (except very wealthy ones) aren’t in a position to single-handedly stimulate consumer confidence, but banks sitting on hefty sums of bailout cash certainly are. And as @T-J explained above, the businesses they’re currently refusing to lend to aren’t necessarily unviable.

  • Richard Dean 2nd Aug '12 - 10:50pm

    I suspect that banks are NOT sitting on helfty sums of bailout cash. Those bailouts were to cover losses and to get the reserve ratios back to safe levels.

    Is this really a crisis of confidence? My impression is that the main message coming at the general public is that they have to get their levels of debt down, just as the government thinks not has to get its debt down too. There are also signficant redundancies happening in the public sector, driven by government. With these messages, any sensible person stops taking business risks and hunkers down till things get better. It’s not confidence, it’s the savings trap transformed to a debt context.

    Economists don’t seem to have proper models for this at all. Y=C+I+G doesn’t seem helpful. People speak of boom and bust as if they were part of a natural, rather smooth cycle of economic life, whose courses can essentially be modelled by differential equations.Catherine has well remarked that boom and bust are not that at all. They are two stable states, and catastrophe theory looks more like the proper way to model them.

    Which means that we escape bust by applying a severe shock. I wonder what it might be. One possibility, could be widespread riot, as indeed is beginning to be seen. This would increase the risk of damage to assets, and so encourage owners to make productive use of assets. Another possibility would be a miltary coup d’etat, not an impossibility in the UK. The result could be a centrally planned economy in which everyone has an income but the goods on offer aren’t necessarily what everyone wants.

    Could Vince and co please arrange some shock that is a bit less devastating than these might be?

  • Dave Simpson 3rd Aug '12 - 8:24am

    I run our printing society, and as such was recently phoned by our bank offering us a loan – so they are trying to lend to small businesses etc. – at least to those they percieve as good risks (we have always kept a minimum of a few hundred pounds in our account.) Before anyone asks, the bank concerned is Barclays.

  • Jonathan Hunt 3rd Aug '12 - 2:31pm

    WHO ARE THE BANKERS IN THE BLACK? Exclusively privately owned ones, whereas those subsidised with public money can continue to soak the taxpayer to pay for their past misdemeanours — and a lot of their current ones.

    If we really want to get the banks to lend to small business, why not impose a windfall tax on cash held above sensible, agreed reserves and other money not properly or fully employed, with the option of avoiding the tax on money lent to SMEs?

    And when the Libor scandal is unveiled, it will be time for mass compensation of the assets of banksters who gained from it. A side benefit would be to reduce the cost of country estates and posh London abodes.

  • Jonathan Hunt 3rd Aug '12 - 2:51pm

    And when the Libor scandal is unveiled, it will be time for mass compensation (sorry CONFISCATION) of the assets of banksters who gained from it.

  • The most effective way to increase lending would be to negotiate a longer implementation of the new capital requirements on banks so there is less need to restrict lending to meet regulatory requirements.

    This would heave to be a realisticly set time scale agreed by everyone involved in setting the new Basel requirements.

  • @ Jonathan Hunt

    Are you suggesting that companies with reserves in cash waiting for (or looking for) opertunities to invest should be penalised?

  • Jonathan Hunt 4th Aug '12 - 11:04pm

    Yes. Much of that money was made available to lend to small firms.

  • Richard Dean 4th Aug '12 - 11:32pm

    Companies that have cash reserves have earned that cash from work. That money is owned by those companies. It might be used as bank reserves, but it is not the same as money made available by government so that banks can lend.

    In fact, was any money at all made available to banks so that they could lend? They were bailed out to the extent that their existing losses did not cause them to crash, and perhaps to help regain safe reserve ratios. But after being saved from losses and regaining safe reserves, a bank is still not in a position to start new lending. By law, as I understand it (and I may be wrong), a bank has to have some more money coming in that it can then use as the additional reserves that are needed to support new loans.

    Perhaps someone could comment on whether this is correct? And is it possible that Osborne and Cable might have actually not understood what they were doing? Or perhaps the banks were in worse shape than they let on?

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