THE Government has told regulators that it would not accept part-nationalised Royal Bank of Scotland and Lloyds Banking Group raising equity from investors or tapping taxpayers for more cash, a Bank of England policymaker has revealed.
Andy Haldane, executive director for financial stability at Threadneedle Street and a member of the Financial Policy Committee said the Government's twin role in regulation and as a bank shareholder was "awkward for everyone".
He also stated that Co-operative Bank, which last month suffered a massive credit ratings downgrade, needs to take action to become more secure.
RBS and Lloyds were told by regulators to improve their capital buffers, but it was announced last month that they would not have to sell more shares.
Instead Edinburgh-based RBS is to further shrink its investment bank and float part of its US bank while Lloyds, owner of Bank of Scotland, is selling loan portfolios.
This prompted claims, denied by Bank policymakers, that the banks had been "let off the hook".
Mr Haldane told the Treasury Committee of backbench MPs yesterday that the Government had narrowed the options available to beef up the institutions' capital cushions.
"It was made very clear to us that was not to come from Government or indeed from private sector sources," he said. "These shortfalls needed to be made good by asset disposals."
Mr Haldane said that the decision last month of credit ratings agency Moody's to downgrade Co-operative Bank by six notches to junk status, was "surprising, I think to almost everyone".
Mr Haldane said: "Thus far this has not caused the haemorrhaging of liquidity that some might have feared."
But he added: "Further needs to be done to put Co-op in a situation of resilience and sustainability."
Asked if Co-op, banker to Celtic Football Club, posed a threat to the wider financial system, Mr Haldane said the FPC would "reach judgement on that", once it knew more about its plans.
MPs on the Treasury committee have summoned Lloyds chief executive Antonio Horta-Osorio and chairman Sir Win Bischoff to explain next week the reasons for the collapse of a deal to sell 632 branches, including Lloyds TSB Scotland, to the Co-op.
Committee chairman Andrew Tyrie said: "This divestment should be an important opportunity to boost competition in the UK retail banking market. It could have significant benefits for consumers."
Paul Fisher, the Bank of England's markets director, yesterday urged an end to the uncertainty around plans for 81% taxpayer-owned RBS.
Mr Fisher, a member of the Bank's Monetary Policy and Financial Policy Committees, said RBS's ability to attract investors and sustain lending was hampered by a lack of clarity over when it would be privatised and whether it might be split up.
"As a matter of market management, I think it is the uncertainty about RBS which has been holding investors back," Mr Fisher said at an investment conference in London.
Chancellor George Osborne is expected to use a speech on June 19 to signal that the time is right to offload the state's shareholdings in the part-natioanlised banks but he is not expected to explain how.
There have been calls from Bank of England Governor Sir Mervyn King and members of the Parliamentary Commission on Banking Standards to break up RBS so it can enter the private sector without its troubled loans.
But in a note for clients, Espirito Santo analyst Shailesh Raikundlia reported that Richard O'Connor, head of investor relations at RBS, had told analysts that splitting RBS in two was considered five years ago but would now take too long to implement.
Mr Raikundlia said RBS told them an idea of offering shares in the bank to anyone with a National Insurance number could be too complicated with an institutional sales process more likely.
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