BANKING & FINANCIAL MARKETS
From the desk of MD
SINCE the economic turmoil that followed the banking crisis, restoring financial stability has been of paramount importance for the British government, as it has been for many other countries around the world. Worries, in Britain, about limiting the exposure of taxpayer’s have clearly fallen into second place. And, the need for banking customers to continue to enjoy a competitive market has fallen way down the list on the government’s priority agenda. Indeed, the government waived competition rules to let Lloyds TSB take-over Halifax Bank of Scotland (HBOS), Britain’s biggest mortgage lender. Though, initially, the move seemed to hold up an ailing market, the merger proved to be a disaster for Lloyds, as the merged group then required a massive state bail-out.
Now that the crisis is abating, fostering a competitive banking market is becoming more significant again. The intervention of the European Union’s competition commissioner, Neelie Kroes, earlier this month, forced ING, a rescued Dutch Bank, to split its banking and insurance operations. Kroes also imposed restrictions on lending and deposit-taking at Northern Rock, a nationalised mortgage lender which the British government is currently splitting into a “good” bank, which it intends to privatise, and a “bad” part, containing toxic assets, that is to be wound-down.
ON NOVEMBER 3rd, the Royal Bank of Scotland (RBS) and the merged Lloyds Banking Group gave announcement that it would set out divergent paths for the two biggest banks that the British government had to rescue. But, at the commissioner’s insistence, both must now pay a price, through disposing of some of their business, in return for the state aid they received. More than 900 bank branches are to be put on the market over the next four years with some well-known insurance firms also to be sold.
The government’s aid for the two banks came in two forms. First, both received a huge input of equity capital as an emergency measure, worth £20-billion for RBS and £17-billion for Lloyds, when the banking system verged on the point of collapse a year ago. Then, early this year, as banks raised anxieties over losses from a savage recession, RBS and Lloyds agreed in principle to join an Asset Protection Scheme (APS). Under such a scheme the taxpayer would cap losses by providing a form of catastrophe insurance in return for fees paid by the banks. Altogether the APS was to cover £585-billion of suspect loans and other assets, £325-billion at RBS and £260-billion at Lloyds. 80% of that total sum derived from HBOS’s poor lending decisions.
For some time, Lloyds has been trying to evade the clutches of the APS, because it perceives its terms – an upfront insurance fee of £15.6-billion – as onerous in relation to the likely risks on the assets covered. Instead of joining the APS, Lloyds is to shore up its capital by making a rights issue of £13.5-billion, and turning £7.5-billion of bonds into ones that convert into equity during times of stress, named as “contingent convertibles”. The government will subscribe £5.7-billion to the rights issue, in line with its 43.3% holding in Lloyds, but will receive £2.5-billion for the implicit cover offered by the APS since March.
In contrast, the more decimated RBS, which made an ill-fated take-over of ABN AMRO, another Dutch Bank, on the eve of the financial crisis in 2007, must stay in the APS. However, the state insurance scheme will now cover £282-billion of loans rather than the £325-billion originally intended. The bank is to cover, though, the first £38.7-billion of any losses it suffers, up from the initially stated £19.5-billion. As already planned, albeit in stages, the Treasury will provide an additional £25.5-billion of equity capital to bolster the bank’s balance-sheet, raising the government’s economic interest in the bank to 84%; its ordinary shareholding will remain at 70%.
THOUGH Lloyds may no longer need the government’s insurance scheme, it has clearly benefited from the state injections of equity capital, old and new. As a resultant cost it will have to dispose of at least 600 branches across the UK, reducing its share of the ‘personal current account’ market by 4.6 percentage points and its mortgage book by almost 20% (in each case Lloyds currently dominates the national market with around a 30% share). RBS, for its part, will have to sell over 300 branches, mainly in England, which will reduce its share of the retail-banking market by two percentage points. It is also required to sell off its lucrative insurance business arms, which includes Churchill, Direct Line and Green Flag. To assuage popular anger over bankers’ pay, both banks have pledged not to pay discretionary cash bonuses to staff earning over £39,000 this year.
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© Mark Dowe 2009: all rights protected
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Filed under: Banking, Economic, European Union, Financial Markets, Westminster | Tagged: abn amro, aps, asset disposal, asset protection scheme, bad bank, bankers, Banking, banking losses, banking regulation, competition commission, contingent convertibles, debt crisis, direct line, economic recession, equity capital, Financial Markets, financial stability, global financial crisis, global recession, good bank, hbos, ing, lloyds tsb, neelie kroes, northern rock, rbs, retail banking market, rights issue, taxation | Leave a Comment »
















