Thursday, August 2, 2012

With credit conditions and growth deteriorating, UK authorities consider nationalizing RBS

The Bank of England has been quite aggressive in implementing an accommodative policy to stimulate the UK economy. Real 10-year yield is comfortably in the negative territory while the central bank's balance sheet continues to expand (heading for GBP375bil).

The UK Treasury has also been creative in trying to improve credit conditions in the country
Bloomberg/BW: - The 80 billion pound ($125 billion) Funding for Lending Scheme with the Bank of England opens today and allows banks to borrow at cheaper rates for as long as four years. An existing plan based on the same principle that’s limited to small companies will be superseded by today’s program.
Unfortunately the central bank policy and Treasury programs are not making their way into the broader economy. The broad measure of money supply is declining at a record rate.

UK Money Supply M4 YoY SA  (source: Bloomberg)

This is translating into housing prices moving lower and shrinking manufacturing activity.

Source: Markit

In desperation to expand the supply of credit, the UK government is considering some unorthodox and possibly unwise solutions. One of those is nationalizing RBS (a money losing bank that is majority owned by the UK government)  in order to force the bank to lend more. Some apparently want the UK government to be in the banking business.
FT: - Senior government figures are discussing the possibility of buying out private investors in Royal Bank of Scotland and fully nationalising it amid mounting frustration at banks’ failure to lend to British businesses.
Some at the top of government believe the Treasury’s various schemes to free up credit, the latest of which was launched on Wednesday, have not worked, and forcing RBS to lend more is the only way to push the banks into action.

This would mean directing the bank to increase its lending to companies, which would be open to legal challenge by the remaining shareholders. The only way to get round this, say some ministers, is to buy out those shareholders.
The UK government doesn't need to look far however to see the futility of managing a government operated lender. Providing credit to borrowers who shouldn't have access to credit at below market levels is not a way to improve credit conditions. The GSEs in the US (such as Fannie Mae and Freddie Mac) that will end up costing US taxpayers close to half a trillion dollars should be a good reminder. That's why the UK Treasury is against the idea.
FT: - The Treasury remains hostile to the idea of full nationalisation. The department said: “We are committed to repairing and returning RBS to full health so that it is able to support the UK economy in the future, and the current strategy is working to achieve that. The government’s policy has always been to return RBS to the private sector, but only when it delivers value for money for the taxpayer.”
Of course it will be a while before RBS is returned to profitability. In the mean time the UK government should be looking for other alternatives to stimulate the economy. Perhaps programs involving infrastructure investment, the stabilization of GBP vs the euro (the GBP has rallied 11% against the euro in the last year making the UK less competitive), tax cuts, work programs, etc. - all are more promising than nationalizing a failed bank.
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