Leaders: Is threatening banks with nationalisation necessary?

Published on 03/08/2012 00:19

Should the government buy in the outstanding 18 per cent of RBS it does not own and compel the bank to lend to business and households?

The suggestion has gained currency this week, aided, it is believed, by senior Lib Dem members of the coalition. Chancellor George Osborne is opposed. But the idea may not have gained the circulation it has without some tacit support of Conservatives exasperated by the failure of the banks to lend out the massive amounts of liquidity made available through the Bank of England’s quantitative easing programme.

The entire QE exercise, now running to £375 billion and likely to be expanded further before the year-end, was deliberately designed to boost lending and thus the wider economy. That it has failed to do so is a cause of extreme frustration – for business, for the government and for the wider economy.

Compelling a major lender such as RBS into action by whispered threats of outright nationalisation has understandable attractions given the UK’s relapse into recession and worrying evidence that there is little by way of upturn in sight. But not only would such a drastic step place the whole business of lending into the political sphere with the attendant risk of loans being advanced on grounds other than financial; it would also expose taxpayers to potentially even greater losses. This is a diversionary – and dangerous – flight of fancy.

The lending problem is more complex than excessive caution by banks. In addition to conflicting regulatory requirements to establish reserves at higher prudential levels than in the past, they are also having to correct past errors and excesses, with a continuing drive to reduce bad debts and cut exposure to areas such as property and retail. Banks are now also faced with substantial fines for past product miss-selling and even greater fines potentially pending for those found to have participated in the manipulation of Libor.

At the same time, the banks’ large corporate customers are showing no appetite for debt. They have instead been reducing debt and holding cash until there is a reduced risk of major financial turbulence across the Euro zone. This leaves SMEs in the front line of bank loan demand. But this has historically been the riskiest area, and bank loan departments have until now been under pressure not to increase but to cut lending to precisely this area.

The process of financial repair is lengthy. And it will take time before the Bank of England’s latest initiative – the Finance for Lending Scheme – begins to take effect. Under this, it will initially make available some £80 billion to banks and building societies at below-market rates. This needs to be closely monitored and more funds made available as necessary. Practical, positive encouragement will better restore bank and business confidence than muttered threats of outright nationalisation.

Comedy gold can rival the Games

London may have the glory of the Olympics. But Edinburgh has the joy of the Festival Fringe. Already hailed as the greatest show in earth, it begins today with a record number of 2,695 shows. Despite all adversity – the recession, the tram works, miserable summer weather and a ten day overlap with the Olympics – the number of events is up 6 per cent on last year.

Organisers may have shuddered at the sight of near-empty tourist spots in central London as visitors stayed away. But Scotland’s capital can draw benefit from the Olympics. In addition to an almost palpable “feel good factor” as the Games have helped us forget our economic woes, the Fringe provides a complementary draw for those seeking alternative stimulus. August in Edinburgh always has something different and diverting to offer.

And it is the range and diversity of its events that help to pull in visitors from around the world. Comedy has enjoyed a high profile in recent years. But the new spoken word category of events takes in poetry, oratory, storytelling and reportage – all this on top of musical performances and visual arts shows. This year Edinburgh’s art festival has begun its “most ambitious” programme yet, with 45 exhibitions showing in 30 of the city’s museums and galleries during August. Those concerned that the Fringe itself is a diversion from our deeper problems should take comfort in the fact that here is a major artistic festival that makes a very positive economic contribution. It is thought to generate some £142 million for the Scottish economy – and the official festival considerably more. Truly, Scotland’s capital has a festival Olympics with ample medals of its own to offer.