Don’t bet on a good bank/bad bank split at Royal Bank of Scotland. George Osborne, the UK chancellor, used his Mansion House speech on June 19 to announce a study on the possible hiving off the state-held lender’s ropey assets. It doesn’t mean that will happen when the Treasury reports back in the Autumn.
Splitting RBS has been batted about since 2010, when the idea of separating roughly 150 billion pounds of non-core assets was considered. The logic was that the remaining good bank would be more likely to lend, and easier to sell at a higher multiple. The government ultimately balked, fearful of issuing more gilts on the scale needed to fund a separate silo of bad assets. That would have increased national debt just as the euro zone crisis was beginning to worry markets.
Bad bank advocates, such as the outgoing Bank of England Governor Mervyn King and the Parliamentary Commission on Banking Standards, argue that the same logic is relevant today, even though the stock of non-core bad assets has shrunk to 40 billion pounds. With the euro zone less fractious, the UK may be more willing to take on more debt. RBS could even throw in Ulster Bank and investment banking assets, pushing the offloaded entity up towards 100 billion pounds.
It remains hard to argue that such a plan could meet the objectives Osborne outlined in his speech. For a bad bank to be “in the interest of UK taxpayers”, the sale price of the good bank would have to outweigh any associated separation costs. These could involve the government having to take on losses on bad assets over and above where they are provisioned, plus paying over 6 billion pounds to buy out minority shareholders. Osborne last night swore that no new taxpayer money would be committed during the process.
A spruced-up RBS lending boldly would benefit the economy. But if the issue is lack of demand, splitting from the bad bank will make little difference. Given that Osborne now appears in less of a hurry to privatise the bank, the easier and safer path would be to wait for a recovering economy to improve RBS’s value over time. That’s why the chancellor’s statement just looks like a way to keep bad bank bulls happy.