Britannia Radio

Another bank is nationalised (in all but name!) .  This leaves Lloyds 
and HBOS - being forced to merge by government pressure - in limbo.   
HSBC, Abbey and Barclays retain their independence.

It’s the banking crisis that matters and we must hope that Brown (and 
Darling, I suppose) turns his attention to that crisis instead of 
making matters worse by irresponsible borrowing and trying to force 
irresponsible lending on to the struggling but independent sector.   
Nobody mentions the Building Societies who have kept their heads 
above water so far.

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TELEGRAPH   28.11.08
1. RBS now 58pc owned by UK government
Royal Bank of Scotland will be 58pc owned by the Treasury after 
shareholders took up less than 1pc of the shares offered in its 
capital raising.

By Amy Wilson

The troubled bank, whose executives last week apologised profusely to 
shareholders for the way the company has been managed, said investors 
signed up to buy just under 56 million new shares, or 0.24pc of the 
total offered by RBS in October.

Under the terms of its agreement with the government, the Treasury 
will take up the remaining 22.9 billion shares and control 57.9pc of 
the bank.
The RBS shares were on offer at 65.5p each, but held little appeal 
for investors because they traded well below that in the run up to 
the Nov 25 capital raising deadline, falling as low as 41.7p on Nov 
18. RBS shares closed at 55p yesterday.

The Edinburgh-based Royal Bank was Britain's second-biggest before a 
run on its shares in September and October forced it into the arms of 
the government as investors became increasingly concerned about its 
capital position.

The bank may now post its first annual loss in 40 years as bad loans 
rise, and has taken more than £7bn of credit losses this year. RBS 
will probably take more writedowns in the fourth quarter, newly-
appointed chief executive Stephen Hester said earlier this month.

Outgoing RBS chief executive Sir Fred Goodwin and chairman Sir Tom 
McKillop apologised last week at a meeting in Edinburgh to approve 
the £20bn capital raising.

Under their stewardship, RBS had grown from a regional bank to an 
international player with 100,000 staff worldwide. Job losses are now 
expected as the new chief executive Hester seeks to shrink the company.
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2. Nationalising the banks is an act that should be kept in the wings 
for now
By Tracey Corrigan
[NB: Much of this was questioned  by me yesterday afternoon in my 
“Ludicrous, disgraceful and destructive government bullying “ 
posting.  I am glad it has been taken up here -cs]
The bickering over bank lending descended into pantomime farce this 
week. "YOU'RE NOT LENDING ENOUGH!" shrieked Lord Mandelson, who 
surely has a future on the stage of the Hackney Empire if his 
political career founders again.

"OH YES WE ARE!" chorused the banks.

"OH NO YOU'RE NOT!" boomed a troupe of small business owners.
Lord M tiptoed towards the audience. In a conspiratorial stage 
whisper, he asked: "What shall we do, boys and girls? Shall we 
nationalise 'em?"

Before such drastic action is taken, it's worth at least figuring out 
the truth behind this increasingly bitter are-they-or-aren't-they 
argument.
The latest figures from the British Bankers' Association show that 
bank lending to small businesses actually rose by just under £1bn in 
the third quarter - slower growth than in the previous quarter, but 
growth nonetheless. Yet in a CBI survey conducted in October, half of 
all businesses reported a deterioration in the availability of 
working capital, two thirds bemoaned new and stringent conditions 
imposed by banks and a third suffered a reduction or withdrawal of 
lines of credit.

One explanation is that the CBI survey covered companies of all 
sizes, and in fact suggested that larger companies were suffering 
bigger problems, while the BBA only tracks small companies.

Differences of perception may help explain the apparently conflicting 
versions of events produced by bankers and business owners. The 
withdrawal of a line of credit may herald disaster for a small 
business. But it does not count as a reduction in bank lending.

It is still a big problem though. Say, for the last 10 years, Company 
A has had an overdraft facility of £100,000 with Bank B. It has never 
taken advantage of the full amount available, but regularly runs up a 
£50,000 overdraft. However, Company A has had the reassurance of 
knowing that an extra slug of cash is available, if times become 
hard. Well, times are hard and, guess what, the cash isn't available.

Bank B decides Company A can carry on borrowing £50,000 as usual, but 
has cut off access to additional credit, just when it was needed. In 
these capital-constrained days, Bank B no longer wants to hold 
capital against money that might be borrowed, as Basle capital 
adequacy rules demand. And Bank B probably doesn't want to lend any 
more money to Company A anyway.

Bank B knows Company A has a good track record, but doesn't have a 
clue whether Company A's suppliers, or their suppliers, are similarly 
reliable. Bank B knows that a lot of businesses in that industry have 
been going under and it just isn't worth the risk, particularly since 
orders to exercise caution have come down from head office. Sensing 
danger, trade credit insurers stop selling insurance to Company A's 
suppliers, which would cover potential losses if Company A cannot pay 
them. Now Company A really needs that credit line, so it can borrow 
the money to pay its suppliers up front. It cannot get it. So it goes 
under.

This sort of story seems to be becoming commonplace. The liquidity 
crisis which hit banks early in the financial crisis has now spread 
to corporate Britain. The "availability of credit" has declined. The 
penny, for me, has finally dropped.

When the Treasury decided to inject taxpayers' money into LloydsTSB, 
HBOS and RBS, it set a condition that these banks must maintain the 
availibility of lending at 2007 levels. At the time, I thought this 
wording was just a fudge. Now, I think the Treasury meant that these 
banks must continue to make undrawn credit lines available. I don't 
know whether this criterion has been met, but I suspect not.

But some, such as Barclays, did not accept taxpayers' money. In a 
letter published yesterday in The Daily Telegraph, Steve Cooper, 
managing director of local business at Barclays, wrote that "Barclays 
has increased lending and overdrafts for small business year-on-year, 
up by over 5 per cent from the historic high of 2007". Curiouser and 
curiouser.

There must be other factors at play. How much credit were non-bank 
financial companies, such as GMAC and GE, providing to British 
businesses? Since these are not regulated as tightly as banks, they 
are harder to track – and the Government has less of a grip on them. 
And how about foreign banks? The Irish and Icelandic banks seem to 
have become pretty active in the last few years, but the BBA survey 
includes only Abbey, Alliance & Leicester Commercial Bank, Bank of 
Scotland, Barclays, Clydesdale, HSBC, Lloyds TSB, RBS and the Co-
operative Bank.

Are we really asking British high street banks to carry on lending at 
the same levels as before, and also to fill the gap left by those who 
have already fled the field? And can they afford to do so, given the 
shrinkage of deposits and lack of wholesale financing? The banks, 
meanwhile, haven't played it entirely straight either, adjusting 
charges and withdrawing credit lines so that the headline numbers 
still look favourable. To what degree have they cut back existing 
credit lines to small, medium and large companies?

The solution to all this will be more complicated than just shouting 
at banks, but could well be less difficult than nationalising them. 
As Mervyn King, the Bank of England governor (I may cast him in my 
pantomime as the wise old narrator who stands back from the action) 
told the Treasury select committee earlier this week, it may make 
individual sense for banks to curtail lending, but collectively it is 
extremely dangerous and could lead to a deeper recession in which the 
banks themselves will suffer.