Jeremy Warner: Taxpayer gets £2.3bn payback from Lloyds
Outlook: Once confidence goes, there is almost no amount of capital that can guarantee a bank's safety
Tuesday 09 June 2009
Sometimes it seems there is no justice. First into the crisis and in many respects the root cause of all our economic woes, the banks show every sign of being first out. Investment banking profits are once more in fine fettle, bonuses are returning, and in the US, banks are queuing up to repay the "Tarp" money used barely more than six months ago to bail them out.
Even in Britain, share prices have recovered sufficiently to allow Lloyds Banking Group to complete a rights issue and buy back £4bn of the preference shares the Government vested in the combined Lloyds TSB/HBOS group at the height of the banking crisis last October.
Some £1.7bn of the proceeds is being reinvested by UKFI in subscribing to its share of the rights issue, so the net payback to the Government is "only" £2.3bn. It's going to be a long old haul before the entire £17bn of taxpayers' money used to bail out Lloyds Banking Group is repaid, and it will take even longer to get back the £20bn of public money invested in Royal Bank of Scotland.
All the same, this is plainly a positive development for the banking sector as it begins the long march back to financial health. Even as little as six months ago, it would have been impossible for virtually any bank to access the stock markets for extra capital. Yet last week we saw Abu Dhabi place its share stake in Barclays at a bumper profit. Similarly in the US, stock markets again seem to be open to banks to raise money so that the Tarp funds provided by the American taxpayer can be repaid.
So extreme and unpredictable was the scale of the banking crisis we've just been through that it would still be unwise to describe it as now largely over. Yet though there is plainly a great deal of pain in terms of bad debt experience to come, nobody believes any longer that a major bank is about to go bust or needs to be nationalised outright.
Less easy to answer is whether more capital still is needed before the banks get back to creating credit on the scale necessary to bring about a return to sustained economic growth. In most banks, the main imperative is still that of shrinking the balance sheet rather than expanding it.
Banking depends vitally on confidence to stay afloat. Once it goes, there is almost no amount of capital that can guarantee a bank's safety. During the boom, investors, depositors and indeed regulators, allowed banks to operate on wafer-thin capital and nobody cared a fig about leverage, balance sheet expansion and funding. During the bust, it went the other way, when even banks with comparatively high levels of capital became vulnerable to a run.
Sentiment is now reviving again. The careless ways of the boom won't return for many years. Even if markets felt minded and confident enough to recreate them, regulators won't allow it. But spreads are narrowing again, credit markets are reopening, and thanks in part to the Government's "asset protection scheme", investors can feel more confident about the balance sheets of even the most bombed-out banks.
The Government won't get credit for it, and it would obviously have been better had the banking crisis not been allowed to develop in the first place, but the way in which the authorities acted to underpin confidence as the crisis reached its crescendo counts as a rare public policy success amid the present rubble, which may even have prevented a bad recession from turning into a depression.
As for Lloyds, the bank is far from out of the woods. Lloyds will still be lossmaking this year, even taking account of the nearly half a billion it will save itself in coupon payments on the preference stock. Yet when the rights issue was first launched in March, there was a widely held assumption that the rights would be left with the Government, which was underwriting the issue. In fact, the outcome could scarcely have been more positive.
To complete the picture of recovery, Lloyds needs a new chairman to replace Sir Victor Blank, who is taking the bullet for the bank's disastrous merger with HBOS. UKFI, which holds the Government's 43 per cent stake, would be happy with an executive chairman, instead of the more usual non-executive, if the right candidate could be found. Indeed, this is perhaps what the bank needs – a big hitter – after all that's occurred. Might Mervyn (now Lord) Davies, former chairman of Standard Chartered, be persuaded? He can't be much enjoying his new role as Trade minister. Serving a government in its death throes was not what he signed up for.
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