Barty is head of financial policy at Policy Exchange.
the last Labour government bought the stakes in the banks back at the peak of
the financial crisis it did so to prevent a meltdown in the financial system.
The idea was to provide RBS and Lloyds with enough breathing space to repair
themselves, with the eventual objective of returning them to the private
sector. We believe that process is nearing completion. The banks have
delivered, increased their liquidity and built up their capital. Both returned
to profitability in the first quarter of this year. Now is the time, therefore,
to decide how to return them to the private sector.
a paper published today we, at Policy Exchange, have examined
the options open to the Government to do this. Up until now, the idea has been
to privatise the banks in stages through sales to institutions. It was reported yesterday that the Treasury is considering doing this for up to
10% of Lloyds later this year. We think there are two main problems with this
First, it takes too long to privatise the banks in this way. 10% of
Lloyds is only a quarter of the Government's stake. Since there would have to
be a gap (of we think at least a year) between such sales, at best it could
sell half of its stake ahead of the election. For RBS the numbers would be much
lower, and the Government would still be the majority shareholder by the time of
the next election.
Second, the shares would likely have to be sold at a
discount to attract buyers, since the government is known to be a seller.
an institutional offering into a traditional privatisation might get more
shares sold but would still require a discount and would, in our view, be quite
risky given the size of the likely offering. Equally, we think the idea of
giving the shares away, as proposed by Nadhim Zahawi, is unworkable because of
have therefore backed a different scheme, which proposes distributing up to 70%
of the shares to taxpayers. The idea is that every taxpayer would be able to
apply to receive shares – but instead of paying for them up front, they would pay
the Government back at the point of sale. That has the advantage of opening up
the offer to all taxpayers, not just those who can afford to buy the shares. It
also means that the downside for the taxpayer is limited, because if the share price
falls below the price which has to be paid to the Government (known as the
floor price) no one would sell them. In a worst case scenario in which no shares
were sold after ten years they would simply hand them back to the government.
applications would be made over the internet, with just a national insurance
number, date of birth and address required. Applicants would also have to be on
the electoral register to enable a cross-check to reduce any incidents of
fraud. Even though some 48 million people would be eligible, that makes the
logistics manageable. If 30 million people applied, we estimate they could
receive around £1100 of shares.
advantage of the scheme though is that because no-one sells the shares below
the floor price, the share price is largely stabilised. In addition, once the
shares are distributed, the weightings of RBS and Lloyds in the indices would
rise (Government holdings are not currently included because they are non
tradeable) which would force institutional shareholders, such as pension funds and
insurance companies, to buy the shares.
Indeed, we calculate that institutions
would have to buy around 35% of RBS shares and 15% of Lloyds in any large sale.
As a result, we think a traditional offering of shares carried out alongside the
distribution could raise around £14bn and still leave the institutional
shareholders needing to buy more shares from the taxpayers. That £14bn is the
equivalent of the government being able to sell almost all of its stake in
The Government gets more
money at a better price and the taxpayers get the bulk of any upside in the
share price. That is why this scheme is so attractive. We believe the
government should choose to privatise both RBS and Lloyds in this way, enabling
full privatisation of both banks ahead of the next election