Thursday, 10 March 2011

A look at the banking sector/Stephen Williams proposals

There has been some talk in recent days of what the Government should do with it's stake in the banks.  One suggestion by Stephen Williams (Liberal Democrat MP) is that the Government should give the shares to the people and allow them to sell them.  The caveat would be that they couldn't be sold below the price the Government paid (the floor price) and when the shares are sold the Government receives their initial investment.  This therefore allows the general population to make money from the sale of the banks, either profit on disposal or by dividends.  There are some very persuasive arguments for this, as outlined by Mark Pack in the Lib Dem Voice and Richard Morris in his View From Ham Common and it is really good that the debate has been started.

When doing this the major implications that will have to be considered are:
  • What will put the most money back into the Treasury's pocket - whatever the Government receives can be used to reduce it's level of debt, this will lead to reduced interest payments and as such a reduction in the deficit.  
  • Ensuring a situation where the banks can never again hold the country to ransom, decoupling any risk from the "casino" side of the industry with the deposits side.
  • Providing maximum benefit for the economy - a market system needs a strong banking sector, providing liquidity at competitive rates.
  • Is it fair.
I know two of those sound like things that can be done without ownership of two banks, however I feel that we will be in the best position to make reforms whilst still  own 83% of RBS and can therefore directly influence them and 43% of Lloyd's (as such we should be able to influence them).  What is key is that the Government cannot remain a major shareholder in large firms in an industry where it also acts as regulator.

So the first question is will these proposals give more money to the Treasury?  I think the answer is quite possibly.  The Government owns a large number of shares, if it were to try and sell all of them at once the only possible way to do it would be at a discount, reducing the amount of money it recovers.  However the share giveaway scheme will definitely delay the Government receiving the funds (not great when it is still saddled with a huge amount of debt) as the tax payer will then decide when they wish to sell the shares.  They could potentially decide never to sell them, enjoying the small annual dividend payments that should ensue.  There is an arguement that the Government would benefit from the tax on the dividends, however the opportunity cost is the whole dividend the Government could have received.  As long as the "floor price" is set above what the Government paid then it should make a profit, however this totally ignores the time value of money and the cost of the debt growing as a result of not paying it off.  Proper analysis on this would need to be done.

The next most pertinent question in my opinion is, is it fair?  By distributing equally to every tax payer I feel that it would be.  Those who are already earning more will get taxed more on any dividends (and if they already have large capital gains will get taxed on their gains).  

This distribution however is likely to result in the shares ultimately ending up in the same hands as they were previously and the banks being run in the same way.

So overall I find myself leaning tentitively towards being in favour of these proposals but wanting it to be looked at further and still hoping to hear alternative ideas.  Whilst this is being discussed though if I were in government I would be pressing for the following change in RBS and Lloyd's - a change in their corporate structure.

Currently both companies, like most UK companies operate with a single board of directors.  On this board should sit a CEO, likely to be an executive director, and a Chairman, who should be a non-executive director.  The board should then be made up of an even mix of executives (those fully employed) and non-executives (those who are only paid from attending board meetings and should be there as effectively the moral concious of the board).  This would fit with the model of good corporate governance in the UK.  However, I would like to see a two tier board put in place as favoured in Europe.  This would have one board full of executives who are charged with running the business and a second "Supervisory Board" which are made up of other stakeholders in the business.  Usually the Supervisory Board would include people elected by shareholders and representitives of other stakeholders - such as employee representitives (and in other organisations) their bankers.  I think this would result in overall lowered remuniration for the highest paid executives (which would appease the public) and promote stability in the industry.

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