Good bank, bad bank: split RBS or it'll never sell, warns Mervyn King

Outgoing Governor warns Government their plan is failing and says restructure is only hope

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The Independent Online

Sir Mervyn King has told the Government to “face up” to the fact that its plans to return the Royal Bank of Scotland to private hands are failing –  and urged ministers to perform radical surgery on the lender for the sake of the stuttering economy.

In politically explosive comments,  the outgoing Governor of the Bank of England called on the Chancellor to scrap his existing plans to sell the majority state owned RBS back to the private sector in one piece. It should instead be split in two, creating a “bad bank” and a “good bank”, he advised.

“The arguments for restructuring sooner rather than later are powerful ones” Sir Mervyn said. “At present RBS is a portfolio of different activities that doesn’t sit well enough together to make the market want to bid for it.”

The Governor stopped short of urging the Government to acquire the remaining 18 per cent of RBS shares it does not already own, but any restructuring of the bank along the lines Sir Mervyn outlined would probably first require full nationalisation. Sir Mervyn described the present ownership arrangements, whereby the state holds an 82 per cent stake in the bank but exercises no direct control, as “a nonsense”.

Giving testimony to the Banking Standards Commission, the Governor suggested the resultant RBS good bank – freed of the larger group’s bad legacy assets – could be sold to the private sector within a year, where it could support lending. The bad bank, he said, should be kept in state hands while it ran down its toxic balance sheet, even though this would inevitably mean accepting a loss on the £45bn taxpayer stake in the lender, which had to be rescued at the height of the financial crisis.

Sir Mervyn’s comments come just nine days after George Osborne, appearing before the same Commission, explicitly rejected the idea of nationalising and splitting up RBS on the grounds that it would be too expensive for the public purse. The Chancellor said: “I’d have to go to the House of Commons and justify spending several billion pounds, perhaps up to £8bn, £9bn or £10bn, on nationalising the Royal Bank of Scotland.”

But Sir Mervyn said that ministers needed to stop worrying about the public costs and focus on repairing the lender. “We should simply accept the reality today that it [RBS] is probably worth less than we thought and we should find a way to get an RBS that can be useful to the UK economy” he said. “We shouldn’t worry about the apparent scale of the public debt”.

The Treasury said tonight that the Chancellor will be sticking with his original plan, which is to allow the RBS chief executive, Stephen Hester, to nurse the larger group back to health with a view to selling stakes in the entire group back to the market as soon as next year. “Our position on this hasn’t changed” said a Treasury source.

RBS last week unveiled a £5bn loss for 2012, which was driven by fines for various misdemeanours by its bankers including insurance mis-selling and interest rate manipulation. The previous Labour government rescued RBS in 2008 buying £45bn of stock. To realise a profit on this the RBS share price would need to rise to 500p from today’s level of 309p. Lord Oakeshott, the Liberal Democrats’ former Treasury spokesman, said: “The Governor has thrown down the gauntlet to the Chancellor. Of course, he’s right. It’s a nonsense for RBS, the bank we own, to be run at arm’s length, and it must be recapitalised or broken up before it can go back to the private sector. Lib Dems know our economy can’t grow as long as RBS staggers on as a zombie bank, stabbing British business in the back with negative net lending.”

Mervyn to van man in need of loan: Go Swedish

When Mike Benson was denied a £10,000 loan for a new Ford Transit van by the Bank of Scotland despite owning a profitable air compressor parts business in Worcestershire – instead receiving a “patronising” offer of counselling – the 65-year-old vented his fury in a letter to Bank of England Governor Sir Mervyn King.

While he hoped the letter might find its way to Sir Mervyn himself, he did not expect a personal reply – yet that was exactly what he received, with Britain’s central banker telling Mr Benson that he too was fed up of banks denying loans to viable enterprises.

“I was sorry to read of the difficulty you have had in trying to replace your transit van,” he wrote. “I can fully understand how maddening that, and the behaviour you describe from the banks you have spoken to, must have been.” He suggested Mr Benson try one of the new banks operating in the UK, such as Swedish firm Handelsbank.

“I was surprised and delighted when I got the letter that a person in his position had bothered to write to someone in my position,” said Mr Benson. He said he needed a new van after one of his employees ran an ageing vehicle through a puddle, and eventually purchased one with his own cash.