Owning banks is not all its cracked up to be

The government has decided to set up a holding company, UK Financial Investments Ltd, to own and manage all the shares in banks and building societies the government is accumulating at enormous expense to the taxpayer.

This conglomerate is designed to give Ministers a buffer between their decisions, and the actions of all the banks in the portfolio. They hope that as the avalanche of letters and emails comes in complaining about repossessions, foreclosures, cancelled loans, higher fees and charges, interest rates well above market rates and reduced company and individual overdrafts, Ministers will be able to claim it is someone else’s fault. The Chairman of UKFI Ltd will need to spend some of his salary on a flak jacket.

Why doesn’t the government just say they will hold the shares direct but leave the management of each bank to get on with it without Ministerial involvement? I guess they have ruled that option out for two reasons. Firstly, they do want to intervene, but need an intermediary or conduit to do it quietly. What better than a well paid quango company acting as the buffer and the prod to the banks? Secondly, they probably reckon the left in their party would not put up with a policy of complete non intervention. What is the point of a nationalised bank, the left would correctly ask, if it does the same things, imposes the same charges, withdraws the same facilities and pays the same bonuses as a private sector bank? UKFI allows some flexibility when answering the left’s criticisms behind closed doors. The plan is to have studied ambiguity, so the left can travel in hope, whilst markets are reassured.

The government has already had to modify three of its proposed interventions. It stated at the time of the original deals with RBS, HBOS and Lloyds that there would be no dividends, no big bonuses and maintained lending at 2007 levels. Now we learn there can be dividends once the Preference chares are repaid – a lower threshold to jump. There can be bonuses to senior people not on the Board – a good reason for some to resign directorships or to refuse them. There seems to be some retreat from the idea of artificially boosting lending to the levels of the boom, when there could be a shortage of takers for new loans on offer.

All this augurs badly for the experiment in nationalised banking. Still there is no proper audit of the risks and liabilities the taxpayer is being asked to take on. Parliament has been presented with no balance sheet, no accountants report, no revaluation of assets, before it makes its £37 billion commitment to the famous three, nor its £18 billion commitment to Bradford and Bingley. The most basic things that any private sector buyer would require do not appear to have entered the heads of our Ministers. They behaved recently as if they were in the rush of the first day of the January sales with the chance of mega bargains. They plunged into bank buying with a careless ferocity that will come to haunt them.

We have seen how we as taxpayers have already lost £580 million in half a year on small Northern Rock (c.£100 billion of assets) and had to put an additional £3 billion of equity in. How much could we lose in a full year on the £3 trillion of assets at RBS, Lloyds and HBOS combined and the £120 billion at Northern/Bradford? How big should the write downs be to establish safe values on the taxpayers balance sheet? What assessment has been made of recent and prospective loan loss rates? Can Ministers give us an assurance that all their new banks will be profitable from here, and hold assets that do not have to be written down any more? Maybe the government thinks with a portfolio the profitable ones will offset the loss makers. It would still be wise to undertake some audits and do some sums first.

To those who say there was no alternative, I say fiddlesticks. Of course the government and Bank of England needed to lend money and to make cash available. That is their role in the banking system. The government did not need to put up more capital. That is something the banks could have done for themselves, one way or another. The fact that three did not bother to, shows the terms for the taxpayer were not tough enough on the banks.

The government has created a political problem, as well as an economic one. It will have to find a way of answering its many critics, as the banks in public ownership upset customers and make judgements that individuals and companies dispute.


  1. Letters From A Tory
    November 4, 2008

    I gave up being surprised at Labour quangos a long time ago. I very much agree that this is a clever way to exert control over the banks without the media getting wind of it.

  2. Pete Chown
    November 4, 2008

    You're right that the government has created a political problem, and I can imagine how it is going to play out.

    Large companies will get into trouble during the recession, and will find that they have problems raising funds. After getting turned down by the market, they will go to the government. The government will decide that they have a good business plan, and were only unable to raise funds because of the credit crunch. The state-owned banks will be urged to lend money.

    Of course, a few years later, it will turn out that the markets were right all along, and taxpayers will be left with big losses.

  3. Mike Gill
    November 4, 2008

    You don't think this is simply an excercise to place these liabilities in a different category and keep them out of headline public debt? Enron comes to mind

  4. not an economist
    November 4, 2008

    "Can Ministers give us an assurance that all their new banks will be profitable from here, and hold assets that do not have to be written down any more? "

    I really don't think they can. Even after the problems with mortgage backed securities are sorted. Even long term I think these banks will start to incur losses more so than profits. They may say its their intention but I don't think it is likely that a Labour government would allow nationalised banks to pursue the polices implicit in a private sector bank and so earn profits. Social objectives will increasingly start to override the profit motive. And when bank losses start to appear then the issue will be fudged. We will be told that they are not private banks, that private banks waste capital that could be used for socially desirable purposes and that the latter are now determining banking policy. These banks will be increasingly required to invest in areas that serve the "national interest" rather than seeking to maximise a rate of return. Attempts to hold a government to account by pointing out that losses are being incurred and that the nationalised banks are proving to be a burden will be batted away with waffle about mere accounting profit and losses being irrelevant to what will probably be called sthg like "Social Banking". Plus a lengthy diatribe about how "capitalism and private bankers bankrupted the nation in the Summer/Autumn of 2008 and so we can't trust them again can we".

    Of-course the madness could stop. Once economic reality kicks in. But Brown seems to be on another planet at the moment so I don't expect that to happen in a hurry.

  5. Andrew Forbes
    November 4, 2008

    Everyone else has a sovereign wealth fund. We have this. Oh.

  6. mikestallard
    November 5, 2008

    The two Scottish banks and Northern Rock and Bradford and Bingley are all in North Britain, which is where the voters of the Labour Party live. I don't blame the government, therefore, in hiding behind the UKFI front. Their aim is to win the election, after all.
    Spinning is vitally important to all three parties today. Hence the need for interference? How popular a move it would be, for instance, to slap the "fat cats" where it hurts! "Bonuses" are one of the very few technical words which everyone seems to understand.
    Add on the governmental urge to micro manage and – bingo! – you get the present system.
    And, no, it is not going to work. Banks, as you say, deal in trillions: governments deal in millions and billions. They are right out of their depth.
    It does not look good.

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