David Blackburn

Next step for banks provides further vindication of Osborne

Next step for banks provides further vindication of Osborne
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Alistair Darling has unveiled the initial phase of his plan to get the majority state owned banks back into private ownership. RBS and Lloyds will dispose of more than 918 retail branches across the country over the next four years and will receive up to £40bn of taxpayer funds to strengthen their capital bases. In exchange for this injection, both banks have deferred cash bonuses for 2009. Also, Lloyds will not join the government’s asset protection scheme by securing £13.5bn privately through a rights issue.

There is an argument that the government should have gone further and demanded the complete separation of retail and investment arms, followed by additional demergers, and John Redwood makes a clear case as ever. But with both banks still on shaky ground, caution seems wise. Darling is correct that prospective private investment in Lloyds represents a positive development, but that the group requires such a sum is an indication of the recklessness of its previous board, and of just quite how foolhardy the Prime Minister was in insisting that Lloyds buy HBOS. RBS’ £25.5bn requirements and the £8bn contingency facility have rendered me speechless. The simple upshot is that credit remains paralysed and what recovery there has been in the financial sector owes next to nothing to the government’s policy, which remains intent on further borrowing.

The government is adopting aspects of Osborne’s approach, a partial reflection that its own is impotent. The Tories have been calling for the downscaling of these banking giants and increased competition for six months, now the government agree. Likewise, the trade off with no cash bonuses was unacceptable to the government last week, but is now central policy. It’s like nom-doms all over again. Osborne’s most powerful criticism is that there is no guarantee that this latest injection will be anymore successful than the first, a point that Darling fails to answer consistently. After a slow start, there is no doubt that he’s winning the argument.