The Government will hand Royal Bank of Scotland a cheque for £20bn on Monday to take a majority stake in Britain's second biggest bank after RBS shareholders snubbed a £15bn share offer to shore up its capital buffer.
RBS announced yesterday that its shareholders took up just 0.24 per cent of the new shares on offer, leaving the Treasury, which underwrote the share issue, to buy 57.9 per cent of the bank for about £15bn. The Government will also own £5bn of high-yielding preference shares. The failure of the share sale was expected because RBS's shares had consistently traded below the 65.5p offer price, meaning that they could be bought cheaper in the market. RBS shares rose 0.6 per cent to 55.3p, leaving the Government with a paper loss of £2.3bn. But the part-nationalisation is a sobering moment for British banking as what was once one of the world's most admired banks comes under the state's control.
The Treasury insists its stake in RBS will be managed at "arm's length" by UK Financial Investments, the new company it has set up to oversee its stakes in Britain's stricken lenders. But after weeks of bank-bashing, shareholders suspect that the Government will lean on RBS to make credit available to UK businesses and consumers over its international businesses.
An RBS shareholder said: "The cynical view, which is a typical fund management view, is that you can't trust the Government as far as you can throw them. If you didn't already invest in RBS, why would you invest in something where the Government, if not pulling the strings, is influencing policy?"
RBS is looking for three new independent directors, who will be vetted by the Government. The bank will not be able to pay a dividend while the Treasury holds the five-year preference shares and is paying no bonuses to executive directors this year.
The Office of National Statistics will decide in the next few weeks to what extent RBS's £1.9 trillion balance sheet will go on to the Government's books. With the Treasury holding more than half RBS's voting shares and influence over the appointment of directors, economists said the ONS would probably classify RBS as a public corporation.
RBS is the biggest recipient of extra capital after the Government forced banks to boost their buffers against losses to stabilise the banking system. RBS came close to collapse before the Government's intervention as panicked shareholders and depositors lost confidence in the once mighty bank.
The Government is also on track to buy about £17bn of stock in Lloyds TSB and Halifax Bank of Scotland that would leave it owning 43.5 per cent of the combined bank after Lloyds buys HBOS early next year. Lloyds and HBOS shares both closed below the offer prices for their capital raisings, which are also underwritten by the Government, though Lloyds shares rose 35 per cent last week to 168p, close to the 173.3p offer price.
RBS is trying to draw a line under its recent woes under new management. Stephen Hester, theformer boss of British Land, took over from Sir Fred Goodwin on Monday and has said nothing is off limits as he strips out risky businesses left over from the debt bubble. Mr Hester said: "We regret that existing shareholders did not take up their pre-emptive rights but understand that market sentiment toward the banking sector made this uneconomic in the short term. We must put the past behind us and move forward with a clear focus on what we need to do next."