RBS' Stephen Hester explains why governments should never invest in or bail out banks

In a speech at the Manchester Business School, RBS's Stephen Hester explained why governments should never invest in or bailout banks.  In doing so, directly undermines governments ongoing implementation of the Japanese model for handling a bank solvency led financial crisis.

As reported by the Guardian, Mr. Hester observed,

he had "underestimated how intense, critical and long lasting" the spotlight would be on the bailed-out bank and implied that the £45bn of taxpayer cash poured into the bank to save it from collapse was now hindering its return to financial health.: 

"Governments are not good long term owners of complex international businesses. The ownership can cause political controversy of itself, and create pressures that hinder the progress of the subject company."

In short, the bank should have been left to work through its troubles without a government investment.  An investment that was not needed given that banks in a modern financial system can continue to operate even when they have negative book capital levels because they have both deposit insurance and access to unlimited liquidity from the central bank.

As Mr. Hester points out,

There were two years of "heavy lifting, significant clean up costs and vulnerability to outside events" left at RBS, he said. Hester is three years into a five year recovery plan and said his belief that the company can be turned around "has been tested but remains intact". He added that the day when RBS can resume paying shareholder dividends and drive up its share price was "steadily approaching".

The bottom line is that had the government adopted the Swedish model and forced RBS to recognize its losses on day one, it would be well on its way to rebuilding its book capital levels to a point where it could begin paying dividends again without having tied up scarce sovereign resources.