By Michael Burke
RBS has announced it is selling off its insurance arm and getting rid of 2,600 jobs. This is not simply a personal disaster for those workers and the communities in which they live, but it also concerns all taxpayers. That state owns 84% of the bank.
The RBS share price was 44.5p at the end of last week, having been as high as 590p in March 2007. The low was 10.5p in January 2009.While no-one can predict where the share price will go it is clear that all financial assets remain close to fire-sale prices.
But the government is allowing an asset sale when assets can be bought extremely cheaply. There is no doubt too that RBS and other banks are viewed as risky propositions, but the sell-offs, which include branches in Britain and in the high-growth Indian market as well as the insurance businesses are the least risky part of the entire group.
These are effectively public assets which are being sold off cheaply to the private sector in order to boost its profitability. They will also have the simultaneous effect of increasing the public sector’s underlying deficit by reducing its cashflows. SEB has previously pointed out that the management of publicly-owned RBS was also attempting to replace low-interest debt government with higher interest private sector debt, in order to curry favour with financial markets. This is because they intend to be back in the private sector as soon as they can, again at a knock-down price against the interest of taxpayers. So far, they have been frustrated in their fund-raising aims but they are persisting. But the urgency is growing because RBS has moved back into profit. Operating profits were £713mn in Q1, compared to losses of £1.353bn in Q4, partly as bad debts declined .
The stated aim of the RBS bond issuance is to bolster its capital strength. But RBS’s capital strength, measured by its ratio of ‘core assets’ to total loans is currently 10.6%, much higher than both Lloyds and Barclays, which are below 9%. It is difficult to believe that RBS’s loan book is much worse than its rivals and it will face higher levels of default, given the disastrous merger of Lloyds with HBoS.
But so be it. Let RBS borrow more, even at higher interest rates than available from the government. But taxpayers should insist that its capital ratio does not need to be astronomically high, just a circumspect 9%, a little above Lloyds and Barclays. With current capital levels, that would mean RBS could fund a huge increase in productive investment.
RBS’s balance sheet is shrinking because it is refusing to lend and because of losses incurred in speculative investments. But it remains a colossal £1,583bn. Bringing down the capital ratio to 9.0% from 10.6% would release £280bn for productive investment. And with a 9.0% capital ratio, every further £10bn to bolster core capital would release another £100bn for investment. These sums would more than compensate for the entire fall in output during the recession.
RBS can be used for asset-stripping by the private sector and robbing taxpayers, who have poured £122bn into the banks to keep them afloat. Alternatively the public sector, which owns RBS, can use it to benefit the whole of society. The government could end the private investment strike in the British economy simply by instructing RBS to lend to infrastructure projects, transport, Green technologies and housing.