British government moves to downsize bailed-out U.K. banks
Tuesday, November 3, 2009
LONDON -- The British government is moving to break up parts of major financial institutions bailed out by taxpayers, with a restructuring plan expected to be unveiled as soon as Tuesday. The move highlights a growing divide across the Atlantic over how to deal with the massive banks partially nationalized during the height of the financial crisis.
The British government -- spurred on by European regulators -- is set to force the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.
The move to downsize some of Britain's largest banks comes as U.S. politicians are debating whether American banks should also be required to shrink. The Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems. But Britain's decision already is being cited by a growing chorus of experts, including prominent bankers and economists, who want the United States to pursue a similar approach.
"We still need to see exactly which parts the [British] banks will need to sell off to judge whether the goal of having smaller banks is really achieved," said Richard Portes, an economics professor at the London Business School. "But there are lessons here for the United States. The supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them."
The changes would amount to a massive restructuring of the British financial system, among the hardest hit by the global crisis, that could result in what the government has described as the creation of three new commercial banks. The Royal Bank of Scotland -- now 70 percent owned by British taxpayers -- announced Monday that regulators were demanding that it sell off more of its businesses than originally expected. According to British media reports, RBS would be told to sell off more than 300 retail branches in the United Kingdom, as well as several insurance businesses. The sell-offs would pave the way for tens of billions of dollars more in previously announced cash injections from the governments.
Demands that more state aid be tied to downsizing appeared to be emanating most strongly from Brussels, where the European Commission has been pressing the British to shrink its massive banks. In a related move, RBS also announced plans Monday to trim 3,700 jobs, or 14 percent of its workforce, across the United Kingdom.
Lloyds, now 43 percent owned by British taxpayers, is expected to avoid as large a sell-off, in part through a plan to raise private capital and fend off a larger share of government ownership. One source familiar with the talks confirmed that final details were being worked out, with an announcement expected Tuesday.
On Sunday, Britain's chancellor of the exchequer (the equivalent of Treasury secretary), Alistair Darling, also told the BBC that Northern Rock -- a British mortgage giant that became one of the first victims of the financial crisis -- would be split in two parts by the end of the year.
The banks' assets would be sold only to new entrants to the British banking market to ensure more competition. Among the potential bidders here are a major supermarket chain and billionaire Richard Branson, founder of the Virgin group. Darling told the BBC that the sell-offs would not amount to "a fire sale," adding that sales of some assets could take several years to ensure that taxpayers get a good return on their investments in the banks. "We need a safer, more competitive banking system," Darling said.
Britain and the United States developed similar banking systems over the past two decades, both encouraging the evolution of giant firms that sought to offer a range of financial services, from savings accounts to trading in derivatives. But in the wake of last fall's financial crisis, Britain has moved much more quickly and dramatically to reform its financial system. Its decision to invest directly in its largest banks to help them weather the crisis set a precedent for the U.S. bailout that followed.
Proponents of downsizing now are pushing the Obama administration to follow Britain's example again.
One of President Obama's top outside economic advisers, former Fed chairman Paul A. Volcker, has proposed a renewed separation between commercial banking and investment banking. The Glass-Steagall Act, which forced banks to choose between those businesses, was imposed during the Great Depression but largely repealed in 1999.