Sir Mervyn King: Bailed-out banks back in private sector soon

At a speech in Belfast, Sir Mervyn King said that restoring confidence in banks was key to the economic recovery.

On the fate of RBS and Lloyds Banking Group, which contains the Bank of Scotland, Sir Mervyn suggested that the financial institutions would be removed from the public sector soon.

Addressing the CBI Northern Ireland Mid-Winter Dinner, he said: “With proper implementation, there is no reason why the two banks with significant shareholdings could not largely be back in the private sector within a relatively short period. After all, in the US, banks that received state support are already back in private hands.”

The possibility of taxpayers being repaid for the multi- billion-pound bailouts was raised in a speech, which also suggested that a “gentle recovery” has begun. It also talked about inflation targets.

Sir Mervyn’s comments about the two banks led to cynicism from the UK government’s opponents, who expressed fears that the taxpayer would not be fully reimbursed for the £66 billion poured into RBS and Lloyds by the Treasury.

Labour MP Jim Sheridan said: “The most important thing should be that taxpayers are seeing all the money we invested returned in full, not some ideological right-wing desire of returning things to the private sector at any cost.

“When George Osborne returned Northern Rock to the private sector, there was a strong case that the taxpayer was not getting the best deal, as it was sold at a substantial loss to the money originally put in.

“It’s public money and taxpayers should be being put first, and not the Chancellor’s friends in the banking sector who fund the Tory Party.”

Scottish Conservative finance spokesman Gavin Brown said: “We would like to see the banks back in private hands as that means the taxpayer investment is recouped. However, this has to be done carefully, at the right time and probably in stages.”

Sir Mervyn acknowledged that the UK had seen weak growth, high unemployment, squeezed living standards and a slower recovery than other  industrialised countries.

Average take-home pay was no higher than in 2004 and there had been a reduction in bank lending. Improving the public confidence in banks was fundamental to turning round the situation, he said.

Sir Mervyn added: “Much has already been done to fix the banking system. And there has been a real improvement in the position of UK banks. Capital ratios have risen, leverage has fallen, liquidity has improved, and bank funding costs have fallen sharply… banks are now overflowing with liquidity, largely as a result of the enormous increase in central bank reserves held by commercial banks.”

But there was still more to be done. Sir Mervyn added: “There remains anxiety in the markets about the resilience of UK banks. This is affecting the terms on which banks can obtain funding and so their ability to lend to the rest of the economy.”