A report by the influential thinktank Policy Exchange says the chancellor should ignore calls from Tory peer Lord Lawson, the outgoing Bank of England governor, Sir Mervyn King, and the archbishop of Canterbury, Justin Welby, to break up Royal Bank of Scotland. Instead, he should press on with a scheme to distribute shares to voters, who would buy them at a later date, alongside a sale to big City investors that could raise new capital. The report, while not commissioned by Osborne, could be influential in shaping his thinking as he prepares to deliver his Mansion House speech to the City next week in which he is expected to signal his intention – but not necessarily the methodology – to return the bailed-out banks back to the private sector in what would be the UK's biggest ever privatisation.
At the weekend it was reported that Osborne could select a traditional privatisation and sell Lloyds first. But it is unclear whether a decision has been made on the way to proceed. Osborne is expected to consider a range of options including the four analysed by Policy Exchange: selling off the stakes in tranches; a traditional privatisation; a free give away; or the option the analysts favour to distribute shares along side a sell-off to City investors.
He is also awaiting the report from the independent commission on banking, whose members include Welby and Lawson, and are meeting on Monday to try to reach agreement on their reforms to clean up the City in time for it to be published before the Mansion House speech. The Treasury would not comment on the Policy Exchange report, but said: "The government's policy remains that RBS and Lloyds continue to become stronger and safer banks that support the British economy, which in time can be returned to full private ownership when it's in the interests of the taxpayer to do so. As the chancellor has said, we need functioning banks supporting the real economy instead of nursing their wounds, and we will set out the way ahead once the parliamentary banking commission has completed its work." It is a politically sensitive issue with Vince Cable, the business secretary, arguing against a rapid sale of RBS.
The Policy Exchange report includes a series of calculations that could allow Osborne to argue that the government was making a profit on its stakes at current prices of at least £1bn even though shares in both banks are worth £18bn less than the £46bn the taxpayer paid for them in a series of rescues during 2008 and 2009.
In its calculations, the thinktank reduces the price at which taxpayers break even on their stakes by incorporating fees paid by the banks to the government. Under that scenario, the taxpayer's 39% stake in Lloyds break even at 51p compared with the 73.6p identified by UK Financial Investments, which looks after the taxpayer banks. For RBS, the break even point fall from 502p to 360p
The recommendation is in stark contrast to the expectations of the City and some Treasury officials who believe the sell-off should take place in a series of sales that in the case of RBS could, according to Policy Exchange, take six years or more. Offering shares to the public – building on an idea proposed by the Portman Group in 2010 and supported by Liberal Democrat MP Stephen Williams –alongside a traditional share offering would "create a whole new generation of shareholders", according to James Barty, the author of the report. Barty, the former head of global equity strategy at Deutsche bank, said: "We urge the chancellor to take on the doubters and move ahead with this scheme."
Portman developed a model that guarantees a fixed minimum price, known as the "floor price", allowing people to pocket the difference when the share price rises above this level.
Policy Exchange has tweaked the methodology, requiring UK residents aged 18 and over with a national insurance number and on the electoral role to apply for shares in both banks. The value of the stakes will depend on how many of those eligible apply – Policy Exchange estimates that between 20 million and 30 million people will apply, four times the number involved in the demutualisation of the Halifax building society 15 years ago.
They would receive shares valued at between £1,100 and £1,650. The shares applied for would be divided equally among applicants, who would pay for them when they sell at a later date. The government receives the "floor price" and profits for the individual paid into a nominee account.
A major sell-off to big City investors would take place alongside, the report says, raising up to £14bn. "We believe the government should view the purchase of the stakes in RBS and Lloyds for what they were – a recapitalisation to save the UK financial sector and hence the UK economy from a disaster. Even if the loss runs into a few tens of billions from the initial purchase prices it could well be argued that it was price worth paying," says the Policy Exchange report.
Four sell-off options for the chancellor
Staged sale:Policy Exchange said Lloyds could be sold in £5bn tranches, leaving a 15% stake by the time of the election. RBS could take up to six tranches, which could take six years and would not be complete by the election. The Treasury has treated this option as its base case for a sell-off.
Traditional privatisation: Some £15bn of shares could be sold off in one hit but banks are not, yet, regarded as utilities, which was the case with the 1980s sell-offs. The risks to the government are high – there might not be enough interest, and all EU citizens might need a chance to get involved. The shares would also need to be priced at a discount to current prices, already trading at losses.
Giveaway: Proposed by Nadhim Zahawi, the Conservative MP. This simple handout of shares is costly, involving a £50bn writedown on the national accounts, and could prompt large-scale selling of the shares. The government might also be forced to make them available to all EU citizens.
Policy Exchange's favoured proposal: Builds upon the idea of Portman and Williams. Taxpayers apply for shares at zero initial cost, but the government fixes the price at which they will pay for the shares later. Crucially, it allows a sale of shares to City and retail investors to take place at the same time. This would allow the banks to raise extra capital.
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