In the last chapter of "Reading and Understanding the Financial Times" I focused on the collapse of Northern Rock in the UK. In the second edition of this book (due to be published in early December) I update this story and also look at the demise of Citigroup in the US. The plight of the banking system remains very much in the news with today's major business story focusing on both the Royal Bank of Scotland (RBS) and Lloyd's Banking Group which will soon be selling off branches as the UK banking industry faces yet another major period of change. These plans follow rulings from the European Commission which is seeking to ensure that competition rules are not broken folowing the bank bail outs by the UK government. The headline numbers are that RBS will lose 318 branches and Lloyd's will dispose of more than 600 branches. At the same time Lloyds, which is 43.5%-owned by the government, also announced plans to raise £21bn, including a £13.5bn rights issue, in an attempt to stay out of the Government's Asset Protection Scheme GAPS). However, it will pay the UK government £2.5bn to avoid joining GAPS which provides state insurance against past toxic loans. This money will cover the past six months of insurance through this scheme. At the same time RBS has stated that it will join the scheme on a revised and more expensive financial terms.
It seems clear the UK banking system remains in serious difficulties and the government's strategy is somewhat confused. On the one hand it wants the banks to rebuild their balance sheets and increase their access to more liquid assets. While at the same time it wants these same banks to be aggressively lending to companies and individuals to pull us out of recession during the first half of 2010. The fact that the next election is getting ever closer probably goes some way to explaining these two contradictory objectives. It is not an easy time to be a bank manager!
Nov 3, 2009
Lloyds and RBS to reshape Britain's banking structure...
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So yet again more money has been injected into the banks at the tax payers expense with the balance nor surpassing that of the country's NHS Budget. With money having had to be injected into these banks in the past it is hard to see why Lloyds and RBS have had to be helped further with more injections of cash. Northern rock which is now owned nearly entirely by the government could shortly be joined by RBS who now have a 84% stake and Lloyds shortly behind with a 44% stake.
Lloyds are planning on some capital financing such as the highly advertised rights issue which even still could have nearly half of it bought by the government anyway. I can totally agree that the banking sector is in difficulties and think that the government needs to lay down some new rules or at least somne guidelines to get them out of trouble instead of investing further into these institutions.
As with all my comments, it’s not influenced by other people. Therefore it is true to say that my opinion is my own and is not copied. I will refer to other people’s comments if I think it is useful, however no governmental figure, business owner, fellow student or anyone for that matter will have any influence on my opinion. If I feel as though it is, I will try to mention it. The new topic in Kevin’s interesting blogs is government intervention. This is where the government intervene in helping failing banks, this is done through buying the banks which has been done to Lloyds at above 40%. But why do banks offer to do this, and why did they help Lloyds. It is simple to say that if banks go bust, then everyone’s in trouble. This is because banks owe people money, and therefore if they do not pay then consumers will have no money to spend. Also people have mortgages with these banks and people do not want their high street bank to go bust. The question is should the banks help? Most people will say yes, but when should they help when the banks go bust. Should the government be considered as a businessman, in other words buying stocks when they are low and then hope it will rise. Perhaps the government should help, just before things go down. Also a good idea is to nationalise then sell the shares to the public. This is obviously being done as it is mentioned. The government therefore should buy, sell to the public and then make a small gain. The government wins, banks are stable, and the public re-own it. And therefore the government quietly steps out, and the banks are public run and the government just keeps an eye on the banks. Therefore the banks are stable at the end, and the government can take care of other problems like the NHS, education etc. Because it would be a rather different world where the government intervened in everything, and would the public want that the government controls everything. Therefore two questions should be asked. The first is does the public want government taking over banks or maybe everything? And secondly if the government offers help, when should they help?
I know when I say the word everything sounds vague. But when Thatcher was in power, there was some major companies which were governmental owned. An example can be British telecom.
This blog is interesting – as both banks are aiming to receive a total of £54 billion between them of funding in a bailout from the UK taxpayer.
In that week, it was announced that the treasury would inject £25bn of new capital into RBS, bringing them closer to being nationalised by the government. However, this contrasts with Lloyd banks, which is willingly fighting for its independence as demonstrated in a £13.5 billion rights issue capital raising. The capital raising will allow Lloyds to avoid the government interference, which would give the government a majority stake.
There are several disadvantages to a bank being nationalised (as RBS are getting closer), one being such as the government itself having the extra burden running a sector of the economy. At the current state the government is in now, it could be a worry what the governments next strategy could be, as its not when we will be affected, but just how much we will be affected.
RBS and Lloyds have both struggled immensely during the recession. Royal Bank of Scotland (RBS) and Lloyds Banking Group are to sell off hundreds of branches in another major shake-up of the UK banking industry, over the 4years as already stated. RBS will sell its NatWest brand in Scotland, RBS Insurance and Global Merchant Services, its card payment business. The total disposal will be 318 branches in the UK, or 14% of the RBS retail network.
Lloyds, which is 43.5% owned by the government, also confirmed it would stay out of a government-run insurance scheme and would instead raise £21bn, including a £13.5bn rights issue. The down side to this is that the Bank will have to pay the UK government £2.5bn to avoid joining the Government Asset Protection Scheme (Gaps), which provides state insurance for past toxic loans. Whereas RBS has confirmed it will be joining the scheme.
This restructuring is helping re-stabilise RBS to be able to stand -alone. Although it is also likely due to this there may be a drop in UK market share by two percentage points in retail banking. Successfully restructuring will enable more investments and confidence in the banks to build back to how they were before the recession. This will also lead to companies feeling confident in taking out larger loans so getting the economy running.
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