Is breaking up the RBS and Lloyds a good idea?

David Worsfold
09 Apr 2009

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I am totally unconvinced by the new Conservative policy of breaking up the partially state-owned banks as their ownership is returned to the private sector. Shadow Chancellor George Osborne's speech advocating this earlier this week was full of glib phrases - "too big to fail but potentially too big to bail" - but desperately short on substance and an understanding of the consequences of pursing such a policy.

We need a banking sector that is fit for the modern world, one that will be increasingly global despite the current retrenchment by some multi-national corporations. I say "we" and I really mean Britain here. If British banks are too small to serve the needs of global corporations then they simply won't get the business and huge amounts of capital will flow out of the City of London and the UK economy. That will cause untold economic damage.

Mr Osborne also failed to say what he would do with the banks that remain wholly in private hands. Is he expecting the Financial Services Authority and the Bank of England to break them up? If they aren't broken up, how will he stop Barclays, HSBC, Santander and others outside the UK regulatory net buying up the nicely parceled-up mini-banks he will create with his privatisation programme?

Where he could have a point that would have been worth making - because the government is very quiet on this - is how do you return such huge state holdings to the private sector without de-stabilising the stock market and the banking sector? Timing will be one part of the answer but selling stakes off in digestible chunks will very likely be another. This lack of an properly thought out exit strategy is one area where the opposition should be scoring a few hits on the government.

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