Bank break-up 'will hit taxpayer'

Executives in charge of government's stake in bailed-out banks say taxpayers will suffer if John Vickers recommends that financial institutions be split up, because value of banks will fall

A break-up of the banks will hit taxpayers because it will reduce the value of their stake in bailed-out Lloyds and RBS, it was claimed today.

Executives from UK Financial Investments (UKFI), which manages the government's stake in the part-nationalised banks, said Sir John Vickers's banking reform inquiry could affect the value of Royal Bank of Scotland and Lloyds Banking Group.

Robin Budenberg, chief executive of UKFI, told the Treasury select committee: "We've looked at the dramatic separation option. It's difficult to know the full implications, but it would clearly be negative for value and that is something that we have discussed with Treasury officials."

For that reason, it is unlikely that any of the government's shares in RBS, in which the taxpayer has invested 45bn, and Lloyds, into which the taxpayer has poured 17bn, will be sold before the commission reports in September.

A sale of Northern Rock could happen sooner, though. The Labour MP Chuka Umunna has tabled an early day motion calling on the government to study the feasibility of returning the Newcastle-based lender to the mutual sector.

Earlier this month UKFI began the process of selling off Northern Rock by inviting investment banks to tender for the contract to provide advice on the future of the mortgage bank.

The Umunna's motion, also supported by former Liberal Democrat leader Sir Menzies Campbell, notes the consolidation which has occurred in the financial services sector since the crash of 2008 and points to the mutual's record for customer satisfaction and links with local communities.

Keith Morgan, the UKFI of! ficial r esponsible for Northern Rock, admitted today that remutualisation was being considered. "It is a realistic possibility," Morgan said, although he added that the ability of a mutual to raise funds and boost competition would also need to be considered.

Umunna said: "If we are serious about changing the way the sector operates and its attitude, what better way to start than by remutualising Northern Rock plc and giving life to the mutual sector?"

Northern Rock plc, which is being readied for sale, is the so-called "good bank", which has been stripped of the taxpayer loan used to prop it up in 2007, and is funded by retail deposits. It made a loss of 142m in the first half of 2010.

It has been split off from the "bad bank", containing troubled loans and 22bn of government money, which has been united with Bradford & Bingley's mortgages to create a holding company known as UK Asset Resolution.

MPs asked the UKFI representations if they had been involved in the so-called Project Merlin talks which are intended to lead to restraint on bonuses and encourage banks to lend more.

Budenberg admitted he had no direct involvement in the talks, but had told the bailed-out banks that its would be a "good outcome" if they participated in the pact. Project Merlin has currently stalled after an announcement pencilled in for last Monday was suddenly abandoned.

Budenberg also said that the bailed-out banks would be put at a competitive disadvantage if they were forced to disclose more information about top pay than rivals. The government has stepped back from implementing proposals by Sir David Walker that pay of more than 1m be disclosed, although there have been calls for the bailed-out banks to comply anyway. Budenburg promised to discuss disclosure of pay with Lloyds.

The Labour government considered whether it was feasible to return Northern Rock to the mutual sector it left in 1997. In 2009 the then Treasury minister Sarah McCarthy-Fry responded to a question about remutualisation of Northern Rock by saying: "Nobody has ruled that out ... there is a real opportunity for us to look at this. But I'm not pretending it's going to be easy."


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