Taxpayers duly took ownership of the Royal Bank of Scotland yesterday, or at least 57.9% of it. Once the share price fell below the offer price, there was no incentive for shareholders to buy them, leaving the Treasury to mop up a majority stake in one of the world's largest banks. And though they are not on anyone's Christmas list, taxpayers are also buying £5bn of the bank's preference shares. The challenge now is to balance the interests of taxpayers with those of customers, shareholders and staff. This means the RBS of the future must differ markedly from the one we know. In recent years, under the energetic leadership of Sir Fred Goodwin, the bank embarked on rapid expansion. Simultaneously, along with other banks, it became dangerously exposed to debt-based US sub-prime property loans. The complex financial technology of structured investment technology and credit default swaps enabled it to grow faster than the underlying economy and lend freely at competitive rates of interest.
Taxpayers duly took ownership of the Royal Bank of Scotland yesterday, or at least 57.9% of it. Once the share price fell below the offer price, there was no incentive for shareholders to buy them, leaving the Treasury to mop up a majority stake in one of the world's largest banks. And though they are not on anyone's Christmas list, taxpayers are also buying £5bn of the bank's preference shares. The challenge now is to balance the interests of taxpayers with those of customers, shareholders and staff. This means the RBS of the future must differ markedly from the one we know. In recent years, under the energetic leadership of Sir Fred Goodwin, the bank embarked on rapid expansion. Simultaneously, along with other banks, it became dangerously exposed to debt-based US sub-prime property loans. The complex financial technology of structured investment technology and credit default swaps enabled it to grow faster than the underlying economy and lend freely at competitive rates of interest.
Now RBS must revert from being an engine of wealth creation to part of the infrastructure of the economy, servicing the wealth creation of others. This may sound humdrum and old-fashioned but at the moment, with bank lending virtually frozen, it is not happening. If the British economy is to struggle back on to its feet, it needs to happen quickly.
The man charged with bringing it off is Sainsbury's chairman Sir Philip Hampton, who will chair UK Financial Investments Ltd, the arm's-length mechanism created to handle the taxpayers' shares in the bailed-out banks and building societies. His brief includes tackling executive pay and dividend policy. That may prove the easy part because at the heart of these arrangements lies the apparent contradiction between the Treasury's desire to get its money back as soon as possible - preferably with a profit - and the government's insistence that the bank continues to lend to businesses and homeowners, some of whom are bound to default.
The government cannot and should not attempt to micromanage the bank's lending decisions. Gordon Brown should not sit on his hands if customers with good credit records continue to be refused loans, overdrafts and mortgages on reasonable terms. (Yesterday the Financial Services Authority warned lenders they would face sanctions if those struggling with mortgage repayments were not treated fairly.) Commercial judgments must be conditioned to some extent by public ownership. There needs to be a consensus between the government and lenders about what constitutes "normal lending practices".
Much is riding on the success of this strategy. Shortly, UK Financial Investments Ltd will become one of the world's largest bank-holding companies. As Iceland demonstrated, the fate of a country's banks and its entire economy are joined umbilically. The size of the RBS government bail-out is such that the perceived credit-worthiness of UK plc now rests on its fate.
