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RBS Will Be First Guinea Pig For 'Creeping Nationalization'
Royal Bank Of Scotland, Citizen’s Bank’s Parent Company, Fell Amid Gov’t Takeover Concerns
By Jon Menon & Andrew MacAskill, Bloomberg
London — Royal Bank of Scotland Group Plc, facing the biggest loss in British history, promised to make 6 billion pounds ($8.7 billion) available to U.K. borrowers as the government took another step toward full control.
In exchange for government guarantees on losses from toxic debt, the bank will have to sign a binding agreement with the Treasury on how much it will lend and on what terms. Auditors will move in to check the bank is following the government directive.
“We’ll be one of the first guinea pigs,” RBS Chief Executive Officer Stephen Hester told reporters on a conference call yesterday. The Edinburgh-based company is in talks with the Treasury about terms of the agreement. Loans will only be made “on commercial terms and to creditworthy people,” he said.
RBS’s shares tumbled 67 percent in London trading yesterday, the most in two decades, on speculation the government may take full control of the bank. The loans agreement marks the government’s most direct intervention in the management of U.K. banks since the credit crisis started. Prime Minister Gordon Brown said yesterday he is “angry” banks are rationing credit, pushing the economy deeper into its worst recession since World War II.
“The government wants to take control, dictate lending policies, dictate banks’ views of their assets, and generally interfere with what are private companies,” the U.K. Shareholders Association said in a statement, describing Mr. Brown’s plan as “creeping nationalization.” The lobby group represents individual investors.
Banks wishing to participate in the U.K. government’s 100 billion-pound bailout, the second in three months, must agree to “have specific and quantified lending commitments that will be binding and externally audited,” according to the Treasury. The deal was one of “mutual responsibility,” Mr. Brown said yesterday.
“The absence of detail on this is blinding, it is just incredible,” said Peter Hahn, fellow in finance at London’s Cass Business School. “The detail of what the banks are and should be doing is a real mystery.”
Banks slumped in London trading after the bailout announcement. RBS plunged 67 percent, Lloyds Banking Group, formerly Lloyds TSB, by 34 percent and Barclays Plc by 10 percent.
RBS pledged to raise lending by at least 6 billion pounds to British companies after the government agreed to swap its preference shares for ordinary stock, saving the bank 600 million pounds in annual dividends to the Treasury. Northern Rock Plc, another government-owned lender, said it would encourage more mortgage customers to remain with the bank by repaying government loans at a slower rate.
The government has already ousted RBS’s former Chairman Tom McKillop, and replaced him with Philip Hampton, the chairman of U.K. Financial Investments Ltd. which oversees the government’s holdings in RBS and Lloyds.
British banks outside the government’s full control were more cautious about the plan. Lloyds Chief Executive Officer Eric Daniels said the bank will “study the proposals in detail,” in a statement. HSBC, Europe’s biggest bank will “work constructively with the authorities to ensure that these initiatives are taken forward,” it said in an e-mailed statement.
Barclays will work with treasury to “understand the detail of the program,” and “determine how it can be used,” it said in an e-mailed statement.
British banks have slashed lending to individuals and businesses as bad loans rise and the demand for credit declines. Northern Rock said it aimed to lend 5 billion pounds this year compared with 30 billion pounds in 2007, the last full year before it was nationalized.
Convincing ‘Skeptical Public’
The binding loan agreements are designed to convince “a skeptical public that something is happening,” said Derek Chambers, an analyst at Standard & Poor’s Equity Research Ltd. in London.
RBS said it may boost lending by more than the 6 billion pounds it pledged. With the assistance of the government’s toxic asset insurance plan, the bank may find it has more cash to lend.
The U.K. government will charge a fee to insure about 90 percent of banks’ potential losses on assets that could erode their capital. In addition, a 250 billion-pound credit guarantee plan will be extended until the end of this year in an effort to encourage banks to increase lending amid a recession. The plan was unveiled as RBS said it may post an annual loss of as much as 28 billion pounds.
‘Fruitless Objective’
“There is a possibility that this will help, but it will not solve all the banks’ problems across the board,” said Tom Kirchmaier, a fellow at the London School of Economics. “For that you need consumers who are creditworthy and I am not sure that they are out there.”
The plan comes as banks including RBS seek to sell assets and control risks to minimize bad loans during the worst financial funding crisis since the Great Depression.
“I don’t think it will be enough to get banks to increase their lending as the problem is quite large,” said Dave Bradbury, who helps manage about $6 billion at Canada Life Ltd. in London. “Until they get themselves smaller they are not going to increase lending, so it is a fruitless objective.”
In exchange for government guarantees on losses from toxic debt, the bank will have to sign a binding agreement with the Treasury on how much it will lend and on what terms. Auditors will move in to check the bank is following the government directive.
“We’ll be one of the first guinea pigs,” RBS Chief Executive Officer Stephen Hester told reporters on a conference call yesterday. The Edinburgh-based company is in talks with the Treasury about terms of the agreement. Loans will only be made “on commercial terms and to creditworthy people,” he said.
RBS’s shares tumbled 67 percent in London trading yesterday, the most in two decades, on speculation the government may take full control of the bank. The loans agreement marks the government’s most direct intervention in the management of U.K. banks since the credit crisis started. Prime Minister Gordon Brown said yesterday he is “angry” banks are rationing credit, pushing the economy deeper into its worst recession since World War II.
“The government wants to take control, dictate lending policies, dictate banks’ views of their assets, and generally interfere with what are private companies,” the U.K. Shareholders Association said in a statement, describing Mr. Brown’s plan as “creeping nationalization.” The lobby group represents individual investors.
Banks wishing to participate in the U.K. government’s 100 billion-pound bailout, the second in three months, must agree to “have specific and quantified lending commitments that will be binding and externally audited,” according to the Treasury. The deal was one of “mutual responsibility,” Mr. Brown said yesterday.
“The absence of detail on this is blinding, it is just incredible,” said Peter Hahn, fellow in finance at London’s Cass Business School. “The detail of what the banks are and should be doing is a real mystery.”
Banks slumped in London trading after the bailout announcement. RBS plunged 67 percent, Lloyds Banking Group, formerly Lloyds TSB, by 34 percent and Barclays Plc by 10 percent.
RBS pledged to raise lending by at least 6 billion pounds to British companies after the government agreed to swap its preference shares for ordinary stock, saving the bank 600 million pounds in annual dividends to the Treasury. Northern Rock Plc, another government-owned lender, said it would encourage more mortgage customers to remain with the bank by repaying government loans at a slower rate.
The government has already ousted RBS’s former Chairman Tom McKillop, and replaced him with Philip Hampton, the chairman of U.K. Financial Investments Ltd. which oversees the government’s holdings in RBS and Lloyds.
British banks outside the government’s full control were more cautious about the plan. Lloyds Chief Executive Officer Eric Daniels said the bank will “study the proposals in detail,” in a statement. HSBC, Europe’s biggest bank will “work constructively with the authorities to ensure that these initiatives are taken forward,” it said in an e-mailed statement.
Barclays will work with treasury to “understand the detail of the program,” and “determine how it can be used,” it said in an e-mailed statement.
British banks have slashed lending to individuals and businesses as bad loans rise and the demand for credit declines. Northern Rock said it aimed to lend 5 billion pounds this year compared with 30 billion pounds in 2007, the last full year before it was nationalized.
Convincing ‘Skeptical Public’
The binding loan agreements are designed to convince “a skeptical public that something is happening,” said Derek Chambers, an analyst at Standard & Poor’s Equity Research Ltd. in London.
RBS said it may boost lending by more than the 6 billion pounds it pledged. With the assistance of the government’s toxic asset insurance plan, the bank may find it has more cash to lend.
The U.K. government will charge a fee to insure about 90 percent of banks’ potential losses on assets that could erode their capital. In addition, a 250 billion-pound credit guarantee plan will be extended until the end of this year in an effort to encourage banks to increase lending amid a recession. The plan was unveiled as RBS said it may post an annual loss of as much as 28 billion pounds.
‘Fruitless Objective’
“There is a possibility that this will help, but it will not solve all the banks’ problems across the board,” said Tom Kirchmaier, a fellow at the London School of Economics. “For that you need consumers who are creditworthy and I am not sure that they are out there.”
The plan comes as banks including RBS seek to sell assets and control risks to minimize bad loans during the worst financial funding crisis since the Great Depression.
“I don’t think it will be enough to get banks to increase their lending as the problem is quite large,” said Dave Bradbury, who helps manage about $6 billion at Canada Life Ltd. in London. “Until they get themselves smaller they are not going to increase lending, so it is a fruitless objective.”
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