It is profoundly unfashionable to praise this Government for anything, but its rebuilding of the banking system will, I suggest, in five years' time come to be seen as a reasonable success story. Of course, we should not have got ourselves here in the first place and there have been some pretty rum decisions on the way. But we are where we are, and what the Government has now done seems to me to be well-judged.
You have to realise that the Government has three objectives, which are to some extent in conflict with each other. It has to get best value for the taxpayer. It has to maintain the flow of credit to business and the wider community through a period of strain that is not yet over. And it has to secure a banking system that is competitive both nationally and internationally in the longer term.
Value first. The question facing the Treasury as to whether it should pump more money into Royal Bank of Scotland and Lloyds/HBOS is at one level the classic one of any major shareholder in a company that needs more capital. The combined bill looks like being about £40bn, which even in public finance terms is a lot of money. Is it really a sensible investment or are you throwing good money after bad?
My own guess is it will more likely turn out to be to be a sensible investment. But in these mercifully unusual circumstances there is another consideration, which is that if a major shareholder does not support a rights issue, other investors are most unlikely to stump up their share too. So, in practice it would have been very difficult to raise the money for Lloyds and utterly impossible to do it for RBS, but share prices change. The Government – ie us – is currently standing at a loss on both shareholdings, though a couple of weeks ago its holding in RBS was showing a profit. In any case the money is not going into some great black hole. It is genuine investment rather than current spending and will show up on the public balance sheet as such.
In any case, Lloyds is reducing the risk to the taxpayer by extricating itself from the Government's insurance scheme for its most risky debt, paying a fee of £2.5bn to do so. So while we taxpayers are adding risk in one regard we are reducing it in another. With RBS, we do remain very much on the hook – but then we must if it and its subsidiary NatWest are to continue providing a reasonable flow of funds to their customers. Combined, they are the country's largest business bank.
That leads to objective two: keeping the money flowing. There is a genuine debate here. We know the flow of lending to companies is quite tight and that a lot of the lending is for companies that have got into a mess to tide them over. What is less clear is to what extent the low level of lending is the result of companies simply not wanting to borrow, and to what extent it is banks being unreasonably stringent in their lending criteria.
At this stage of the economic cycle, you always get companies complaining about their banks being too cautious, just as at the top of a boom banks shower money on anything that moves. That seems to be one of the sad aspects our economic system. But it is not in the self-interest of a lender to put a company into receivership if it can possibly avoid it. My feeling is that a lot of the problem stems from foreign banks withdrawing from the UK market as a result of pressures from back home, with the result that UK banks have actually to increase their lending just to keep the overall flow of funds stable.
What is beyond dispute is that, as growth resumes, the economy will need to find a way of financing that growth. If banks are to do that, they will need more capital to underpin the increase in their lending. It follows that the Government, as a major shareholder in two banks, had inevitably to stump up some of that capital. It is true that many larger companies have gone to the markets for funds, raising rights issues themselves and issuing corporate bonds. But for most firms that option is not open. They have to have a banking system that has enough capital to support growth.
So we will have a better capitalised banking system but will it be a truly competitive one? Here, our own Government is not really in the driving seat, for we have to comply with what Europe decides. The management of both RBS and Lloyds seem upset at the scale of the divestments required by Neelie Kroes, the EC Competition Commissioner, but it seems to me that what she is calling for is a perfectly reasonable outcome.
These two banks should not be at an artificial advantage over banks that have not received taxpayers' support. Under normal circumstances, Lloyds would never have been allowed to take over HBOS, and it would have been much better for Lloyds shareholders had they not been suckered into it. At least the core business of both banks will be retained.
Divestment is one thing, but of itself it does not ensure a truly competitive banking system. My concern is not so much that this particular level of divestment is judged optimally, but rather that there will be other forces at work in the next few years that will collectively result in a less effective banking system. What seems likely to happen with the recapitalisation of two big banks, and ultimately their floating off back to the private sector, ought to be helpful and I think it will be. Better to have four strong independent UK banking groups than two independent and two hobbled ones. But that does not get us back to the level of competition we had prior to the crisis.
Having a competitive banking system means having reasonable access to new entrants. It means regulation that is predictable and appropriate. It means making it easier for individuals and companies to open accounts, which at the moment is curtailed by anti-money-laundering legislation. It means going beyond the banks and thinking of new methods of getting funds to smaller and medium-sized companies. It means – and this is another unfashionable thing to say – making sure that the international business of the City of London remains competitive.
All that lies ahead. Meanwhile, though, let's recognise what the Government is now doing and why it is doing it – and keep our fingers crossed that our money is indeed being wisely deployed.Reuse content