Background
The government has owned 82% of RBS since late 2008 when it stepped in to stop the bank failing. Recently there have been reports that cabinet ministers have been having conversations about buying the remaining 18% of the bank (at a cost of around £5bn). The intention is to promote greater lending and be able to take more radical action on the bank than could be achieved as a public company.
Impact on securities
While the Treasury decided not to impose loss on debt and Tier 1 hybrid securities when banks were nationalised in 2008 (given the financial instability that would have resulted at that time of high stress), if they proceed to fully nationalise RBS now it is more likely that some securities would suffer loss. Tier 1 hybrid and subordinated securities for example could be completely wiped out.
While the government would want to impose losses it is not clear how this would work in the current framework, as even under the Special Resolution Regime introduced in 2009 there is no provision for direct write-down of debt. A debt write-down tool is planned to be implemented from May 2015. However the government would still be able to impose loss and it would probably happen in one of two ways:
- Some form of deeply discounted coercive tender or exchange offer (similar to what happened in Ireland and what is proposed in Spain), or
- A corporate restructuring that would leave hybrids and subordinated debt in a shell company or bad bank, with poor recovery prospects.
A more difficult question is what would happen to securities issued by subsidiaries, specifically RBS N.V. (the Dutch domiciled bank previously ABN AMRO, acquired by RBS in 2008) as there is not much precedent. There is also a question of which law a bond is issued under. In the case of RBS N.V., most of the assets and liabilities have now been transferred to RBS plc, although some Tier 1 hybrids and subordinated debt remain in the subsidiary (including AUD denominated securities). It is likely that any move to impose losses on Tier 1 hybrids and subordinated debt would also apply to RBS N.V., as it is a fully integrated part of the group and has little operating business of its own, although I suspect there would have to be some negotiation with the Dutch authorities.
Will RBS be fully nationalised?
While nationalisation of RBS is a real risk the government appears to have taken a different approach to achieving its ends by putting significant measures put in place in the last month aimed at stimulating lending and boosting the recession-hit economy (summarised in the last point below and detailed in the previous WIRE article “UK financial regulation relaxed to promote growth”). While the government owns a significant majority, further deterioration in the bank’s position or ineffectiveness of these measures may bring back the possible of full nationalisation.
Pros and cons of an RBS nationalisation
Increased lending?
- Ministers are apparently concerned about the bank’s continued reluctance to lend to small businesses, in spite of several measures brought in by the government to encourage more finance to be made available to this area of the market
- While holding 82% already puts the government in a position to dictate policy the holders of the remaining 18% could object to state-targeted loans and sue the government for dereliction of duty. Buying the 18% stake/full nationalisation would remove that risk
The benefits of delisting
- It may also be beneficial to take the business private and enable it to be delisted. Total state ownership, with political control, would probably make it possible to sort RBS out more quickly and return it to the market after a couple of years with significant restructuring – radical action which is unable to be achieved quickly in a visible public company
Political disagreement
- A clash is likely to develop between the Tory chancellor George Osborne (who is firmly opposed to it. His idea and the coalition's current plan is to nurse RBS back to health and sell it off for a profit) and the Liberal business secretary Vince Cable (who is looking for a more radical solution. In a leaked letter to the PM David Cameron, Cable suggests breaking up RBS to create a "British Business Bank with a clean balance sheet and a mandate to expand lending rapidly to sound business")
- The bank continues to lose money (NPAT loss £1.125bn FY10, loss £1.997bn FY11, loss £1.99bn 1H12). The bank might not be sold at a profit until after the next general election anyway giving ministers a political reason to nationalise it
European Commission issues
- There could also be trouble from the EU. Letting the state direct credit for a bank with a £1trn balance sheet might breach EU state-aid rules
Selling it to the taxpayers
- UK taxpayers are likely to be tired of bleeding money to the banking sector making it a tricky sell. This is not to mention where the additional ₤5bn would come from
The government has just implemented new measures to encourage lending – perhaps that will work
- The regulators have just relaxed capital and liquidity rules in an effort to stimulate lending and boost the recession-hit economy. This represents a significant policy shift
- A Funding for Lending scheme was lunched to encourage banks to lend more. Banks will be able to get £1 of cheaper funding for every £20 of outstanding loans to British businesses and consumers. (£80bn available)