The UK economy is not going to grow strongly unless and until the banks are mended. Many of our troubles today stem from the failure of regulation and bad banking in 2004-7 which got some of the banks into an extreme financial position. This was compounded by the decision to nationalise or subsidise them without forcing changes upon them.
The weakened banks are now under a regulatory cosh to improve their balance sheets. They are told they must have more cash and capital to back up a given quantity of lending. They are doing so not by raising more capital but by lending less. This constrains recovery.
I am not advocating a debt soaked dash for growth to repeat the mistakes of 2004-7. I do not want to see a further surge in house prices and crazy mortgages. I would like to see enough credit around to finance larger infrastructure projects from broadband to tollroads, from new power stations to better water supply and flood protection. I would like to see sufficient credit available on reasonable terms for small and medium sized enterprises needing to expand, to buy capital equipment or to meet sensible working capital needs. I would like to see a decent supply of mortgage finance to pay for homes for a new generation of first time buyers. This is not going to miraculously happen by doing nothing. Nor is it likely to come about with another bout of Quantitative easing.
I suggest the government creates three new UK High Street general purpose banks out of the assets it holds through RBS. Each bank should be given assets and liabilities from RBS, an initial number of branches and staff. These new banks should then be floated on the Stock Exchange. At the time of the float they should raise say £5 billion each in new capital. Their remit should be to provide excellent competitive banking facilities to businesses and individuals in the UK. They could be called RBS, Nat West and Coutts, if you wanted to keep current brands and some of the existing identities. You could call them Tom, Dick and Harry, or any other new name for a new brand. I would want them to be pioneers of better customer service , persuading people that banks can be good allies and service providers to reasonable customers.
The remaining RBS Group could start out again by setting up a replacement UK clearing bank network if it wished. It might need to be called a new name if the RBS brand and name had been sold as part of the break up. The government could still hold on to its shares in the overseas and investment banks that are the rest of the RBS Group if it wished, in the hope that one day the management will get the shares into profit. Or it could press on with the piecemeal disposal or wind up of all the remaining overseas and investment banking assets. The important thing is that three new clearing banks with balance sheets that allow them to expand their UK lending would have emerged from the broken shell of RBS.
These banks could lend on more than the £15 billion of new capital they had raised. They could lend a sum of money that would have a visible and benefical impact on the UK economy. This would be better than QEII. It would provide a market tested stimulus, financing projects that the three new smaller bankruptable banks thought were worth backing.
The public might also feel better about banks if the main one which went so badly wrong were made to pay the price by facing full break up. Minority shareholders might fare as well or better by break up compared to holding on to the current congomerate. If there were any legal and political fuss about the position of minority shareholders a buy back option for them could be part of the scheme.