When the last Labour government bought the stakes in the banks back at the peak of the financial crisis it did so to prevent a meltdown in the financial system. The idea was to provide RBS and Lloyds with enough breathing space to repair themselves, with the eventual objective of returning them to the private sector. We believe that process is nearing completion. The banks have delivered, increased their liquidity and built up their capital. Both returned to profitability in the first quarter of this year. Now is the time, therefore, to decide how to return them to the private sector.
In a paper published today we, at Policy Exchange, have examined the options open to the Government to do this. Up until now, the idea has been to privatise the banks in stages through sales to institutions. It was reported yesterday that the Treasury is considering doing this for up to 10% of Lloyds later this year. We think there are two main problems with this approach.
First, it takes too long to privatise the banks in this way. 10% of Lloyds is only a quarter of the Government’s stake. Since there would have to be a gap (of we think at least a year) between such sales, at best it could sell half of its stake ahead of the election. For RBS the numbers would be much lower, and the Government would still be the majority shareholder by the time of the next election.
Second, the shares would likely have to be sold at a discount to attract buyers, since the government is known to be a seller.
Turning an institutional offering into a traditional privatisation might get more shares sold but would still require a discount and would, in our view, be quite risky given the size of the likely offering. Equally, we think the idea of giving the shares away, as proposed by Nadhim Zahawi, is unworkable because of the cost.
We have therefore backed a different scheme, which proposes distributing up to 70% of the shares to taxpayers. The idea is that every taxpayer would be able to apply to receive shares – but instead of paying for them up front, they would pay the Government back at the point of sale. That has the advantage of opening up the offer to all taxpayers, not just those who can afford to buy the shares. It also means that the downside for the taxpayer is limited, because if the share price falls below the price which has to be paid to the Government (known as the floor price) no one would sell them. In a worst case scenario in which no shares were sold after ten years they would simply hand them back to the government.
All applications would be made over the internet, with just a national insurance number, date of birth and address required. Applicants would also have to be on the electoral register to enable a cross-check to reduce any incidents of fraud. Even though some 48 million people would be eligible, that makes the logistics manageable. If 30 million people applied, we estimate they could receive around £1100 of shares.
The advantage of the scheme though is that because no-one sells the shares below the floor price, the share price is largely stabilised. In addition, once the shares are distributed, the weightings of RBS and Lloyds in the indices would rise (Government holdings are not currently included because they are non tradeable) which would force institutional shareholders, such as pension funds and insurance companies, to buy the shares.
Indeed, we calculate that institutions would have to buy around 35% of RBS shares and 15% of Lloyds in any large sale. As a result, we think a traditional offering of shares carried out alongside the distribution could raise around £14bn and still leave the institutional shareholders needing to buy more shares from the taxpayers. That £14bn is the equivalent of the government being able to sell almost all of its stake in Lloyds.
The Government gets more money at a better price and the taxpayers get the bulk of any upside in the share price. That is why this scheme is so attractive. We believe the government should choose to privatise both RBS and Lloyds in this way, enabling full privatisation of both banks ahead of the next election.