By Gavin Finch and Scott Hamilton
LONDON - Bank of England Governor Mervyn King urged the government to split up Royal Bank of Scotland Group Plc and speed up the return of Britain’s biggest publicly owned lender to private ownership following its bailout in 2008.
“We’re four and half years on and there’s no sign of it going back to the private sector,” King told the Parliamentary Commission on Banking Standards at a hearing in London today. “That indicates we’ve not been sufficiently decisive in recapitalizing or restructuring it.”
RBS should be split into a so-called good bank that could fund itself and a bad bank, where loss-making assets would be transferred, King told lawmakers today. That would require the lender to accept losses on some assets, he said.
The government is pressing Edinburgh-based RBS to sell assets and bolster capital as it tries to recoup some of the 45.5 billion pounds ($69 billion) it pumped into the lender in the biggest bank bailout in the world. CEO Stephen Hester has cut assets by 907 billion pounds, eliminated 36,000 jobs and scaled back the securities unit since he took over from Fred Goodwin. The stock still trades for less than the price the government paid for it.
“Hester has struggled manfully to try and reduce the size of the balance sheet,” he said. “What I’m talking about is different: It’s a much more decisive restructuring. It shouldn’t take more than a year to do,” he said.
RBS has fallen 3.4 percent in London trading so far this year. The shares were up 0.2 percent at 313.5 pence as of 12:45 p.m. today. The government values its stake in the bank at about 407 pence a share, three officials with knowledge of the matter said last week.
“The key thing is to accept that whatever we do now will mean recognizing losses relative to where the public accounts currently show them,” King said.
RBS has been criticized by lawmakers for failing to boost lending to the economy, even though the taxpayer owns more than 80 percent of the lender. Figures released by the Bank of England this week showed the bank pared net lending by 1.7 billion pounds in the fourth quarter. At the same time, regulators are pressing the loss-making bank to shrink its balance sheet and bolster capital.
Lawmakers including Vince Cable have said the government should have fully nationalized the lender, a move opposed by Chancellor of the Exchequer George Osborne, who said last month taking full ownership would require as much as 10 billion pounds of public money.
“The whole idea of having a bank that is 82 percent owned by the taxpayer, run at arm’s length from the government, is a nonsense. It cannot make any sense,” he said.
‘Lessons of history’
King said the purpose of taking banks into public ownership was to restructure them and recapitalize them quickly. He contrasted Japan’s failure to restructure its banking system with Sweden’s nationalization, overhaul and rapid return of its lenders to private ownership in the 1990s. RBS has crimped lending and growth in the U.K. since its bailout, King said.
“The lessons of history show very clearly that it is not a good idea to have banks in the public sector for very long,” King said. “The financial markets realized that the losses out there don’t go away. It’s better to face up to it.”
The bank said last month it would sell a stake in Citizens Financial Group Inc., the U.S. consumer and commercial lender it acquired in 1988, and further pare back its investment-banking unit after coming under pressure from the government and regulators. Still, efforts to reduce the government’s stake are being hampered by regulatory fines for manipulating Libor and provisions for customer redress.
RBS last month posted a full-year loss of 5.97 billion pounds after setting aside an additional 1.1 billion pounds to compensate clients wrongly sold insurance and interest-rate hedging products.
“The arguments for a restructuring sooner rather than later are powerful ones,” King said. “I’d be willing to lend my support. We shouldn’t worry about the consequential impact.”