‘British banking rescue progresses’
October 24, 2008 at 5:24 pm
In the aftermath of the government rescue package for British banks of October 8th, the Treasury has come under pressure from the rescued banks and their investors to alter the terms of the package. The original terms, as reported in this blog, allowed banks up to £25bn in the form of government-owned preference shares. After taking up the government’s offer of help, Lloyds TSB, HBOS and Royal Bank of Scotland announced that they would not be paying dividends to their shareholders until the government had been repaid for its preference shares.
Faced with uncertainty about how long it will be before dividends are paid out again, shareholders have responded with ambivalence to the block on dividend payments, highlighting the friction between providing measures that safeguard taxpayers’ funds and firing up share prices once more. The block on dividends has been criticised for being counterproductive.
Another factor which is damaging the attractiveness of shares in the three rescued banks is the potentially large extent of government intervention in their management in the future. Chancellor Alistair Darling has stressed that the object of the exercise is not for the government to run the banks, and that they will instead be run "on a fully commercial basis by an arm’s length body to act in the interests of taxpayers." However, it seems inevitable that the government’s large stake will have influence on the direction banks take in the future, if only by the obligation they now have to take taxpayers’ interests into account in their decision making process.
Elsewhere, optimism has been voiced, with comments from parts of the City that the rescue package does leave banks with enough flexibility to engage shareholders with the recapitalisation process. If the balance is not struck here, and soon, then the banks will remain a very discouraging prospect for investment.
Reflecting these concerns, on October 16th a sharp drop in the share prices of each of the three rescued banks caused outcry against the terms of the rescue package. However, Alistair Darling has been keen to emphasise that the terms of the package are not going to be ‘rejigged’ to allow public money to exit the banks in dividends.
