Friday, November 2, 2012

Chief Executives of Lloyds and RBS: Government should invest somewhere else and not in banks

Providing yet another reason for why government bailouts are unnecessary for a modern banking system, the chief executives of Lloyds Banking Group and RBS observed that government's should put their money somewhere other than bank equity.

Regular readers know that a modern banking system is designed not to require governments to ever bailout the banks.  This is the result of deposit insurance and access to central bank funding.

With deposit guarantees, banks can continue to operate and support the real economy even when they have low or negative book capital levels.  This is because through the deposit guarantee the taxpayers effectively become the bank's silent equity partners.

As the chief executives point out in a Telegraph article, the funds can be better used elsewhere.

There are not many leaders of a large public company who would openly say their largest investor might want to put their money somewhere else, but among them are the chief executives of Britain's taxpayer backed banks, Lloyds Banking Group and Royal Bank of Scotland. 
Asked this morning what he thought the government should do with its 82pc shareholding in RBS chief, Stephen Hester, gave his standard response that he could not guess the timing of the state's eventual exit, before adding "what I do know is that the money tied up in RBS ought to be used better"....
As Mr Hester observed, the government has a considerable amount of money tied up in both banks that is doing nothing for either the banks or for the economy...
Please re-read the highlighted text as the point that bailout money does nothing for either the banks or for the economy is very important.

No comments: