While the press chose to focus last week on the split at the Bank of England over how much should be spent on quantitative easing, City folk were talking about a far more pertinent issue – the spectre of full-blooded nationalisation of Royal Bank of Scotland and Lloyds to get them lending again. Sources I spoke to say they hear that officials at the Treasury are so frustrated by the stubbornness of RBS and Lloyds – and the other UK banks – over lending that they are saying privately that nationalisation is not off the table.
It's back to haunt us because the repeated attempts by the Chancellor, Alistair Darling, to sweet-talk the banking chiefs into lending more to the corporate sector – and particularly smaller companies – have fallen on deaf ears. Even though RBS and Lloyds are majority-owned by the Government, their bosses are playing hardball because they want to build up balance sheets, so are lending only to top-grade firms. Even the asset protection guarantee scheme does not seem to be working as none of the banks has yet signed up to it.
Obviously this is hugely annoying for Darling, who wants to get lending moving again. But, quite understandably, the banks are ignoring the Chancellor because they want to keep all the capital they can as they prepare for big write-downs, which will come with year-end results. They also know this government has only another nine months at most in power, so they can afford to tough it out.
But there's another, bigger reason they may be holding out: both RBS and Lloyds face being broken up; either by the EU, which is committed to forcing the UK government to dismember them because of the terms of the bail-out, or by a Tory government, which has warned they will be split up on competition grounds.
So we have a stalemate. Darling wants to avoid nationalisation because it doesn't look good politically. But equally he wants, as he said on Friday, "to continue to focus on getting lending going again since that will be the key to sustained recovery".
What else can be done? There's contingency capital provisioning, a move favoured by the Bank of England and used by the Spanish banks, which may well be why they have held up much better than most. This would involve banks building up more capital during good times which can then be used during lean times as a cushion. Another measure would be for a more vigorous stress-testing regime, like in the US, which appears to be working.
A bolder idea – which I have been banging on about for at least a year – is to encourage new banks and credit unions to start up. There's no shortage of capital, and it could be rather a good business. To date, the FSA has received 13 applications from new banks and eight have been given authorisation. Both Darling and the Bank of England's Governor, Mervyn King, are fans of new banks, and more should be done to support such fledgling ventures. Bankers may not be the public's favourites just now, but, who knows, if a few budding banking entrepreneurs stepped forward they could find themselves the heroes of the hour. We shall find out more about what's going on as people trickle back to their desks from Tuscany. But be sure that this banking crisis still has a long way to go.
LENDERS GOT JOHNSTON PRESS INTO THIS MESS – AND THEY SHOULD HELP GET IT OUT
One good test for the current lending behaviour of the aforesaid banks is Johnston Press. Both Royal Bank of Scotland and Lloyds, through its merger with HBOS, the old Halifax Bank of Scotland, are big lenders to the Scottish regional newspaper to online publisher, which has more than £500m of borrowings. The banks were big backers during the good times when Johnston Press went through its acquisition spree, buying the extremely successful Portsmouth and Sunderland Newspapers and Emap's newspaper interests at the beginning of the decade. But it was also the self-same banks which lent to Johnston when it went buying less profitable businesses at the top of the market, when money was being thrown around, particularly at Leinster Leader, Regional Independent Media Holdings and The Scotsman Publications. This shopping spree cost it around £650m, and caused the present mess.
So it would be extremely churlish if those banks were now to pull the plug just as its chief executive, John Fry, is trying to clean up and repair the balance sheet. It would also be inconceivable for the Government – now a shareholder in both banks – not to back Johnston as it is such a big employer in Scotland and pivotal to so many local communities where people have already seen the corner shops, the pubs and the post offices close. To bring down the shutters on the newspapers might just prove to be the final straw – not just for the local population but for the local MPs as they prepare for the next election.
Backing Johnston is not just a good political manoeuvre. It makes financial sense too as the shares look a buy. Lorna Tilbian, the top media analyst at broker Numis, reckons that, at 30p, Johnston's shares are due for a rerating and are a good cyclical stock as the market races ahead on its next bull run.
NON! FRENCH FINANCE MINISTER GETS TOUGH ON BONUSES
France's Finance Minister, Christine Lagarde, is close to replacing Carla Bruni as her country's sweetheart. Lagarde's criticisms of the huge bonuses being paid to bankers is earning her a reputation as a formidable campaigner as she continues to lobby for a worldwide pact on excessive pay. She'll be with President Nicolas Sarkozy this week when they tell the heads of the French banks to curb bonuses in return for getting state money after the outcry over the €1bn (£870m) that BNP Paribas put aside for possible bonus payments. Then she's off to the G20 meeting next month in the US where she will be persuading her peers that an international agreement through a body such as the Financial Stability Board is the best way to stop million-dollar pay-outs. While the former lawyer is going to find it impossible to restrain the banks on big pay, she may be more successful in banning the practice of guaranteed bonuses; the banks might even welcome it, as it makes life easier for them too.