Bank break-up threat could hit Government's stakes in RBS and Lloyds

Chancellor George Osborne’s decision to threaten UK banks with break-up if they fail to meet rules to make them safer could make it harder for the Government to sell its huge stakes in Royal Bank of Scotland and Lloyds, experts warned today.

At one stage the Treasury hoped it could start selling shares in RBS, where it has an 83% stake, and Lloyds, where it has 41%, before the next General Election in May 2015. The taxpayer was briefly — at the end of 2010 and start of 2011 — sitting on a small profit on the £45 billion and £20 billion pumped into RBS and Lloyds respectively in 2008. But since Sir John Vickers’ Independent Commission on Banking published its interim report suggesting “ring-fencing” of retail banks from investment banks, the shares have stayed below the price paid by the taxpayer.

Osborne’s speech today and publication of the Banking Reform Bill have “muddied the waters yet again” according to one senior banker.

“The ‘high stakes’ approach now being introduced to the ring-fence measures presumably will make it difficult for the Government to decide the optimum time to reduce their current holdings in UK banks,” said, Tony Anderson, banking partner and head of financial products at legal firm Pinsent Masons. “There could be significant political fallout for the Government from any proximity between a sell down of shares in a state-owned bank and a full separation of banking operations following a breach of the ring-fencing measures.”

David Buik of Cantor Index pointed out that ring-fencing would not have prevented either the UK bailouts or Lehman Brothers collapse in 2008.

He said: “It was injudicious lending and poor credit analysis that led to the crisis. It was Northern Rock, Bradford & Bingley, HBOS and Lloyds that were the major transgressors. Not those with investment banks.”

International regulators also questioned the need for ring-fencing over strengthened balance sheets.

“Higher capital and liquidity requirements are more important for stabilising banks than the separation of proprietary trading and deposit-taking business,” said Jaime Caruana of the Bank for International Settlements.