Fully nationalising RBS would not only be politically tricky to navigate, it may not actually have the desired effect overall
Would fully nationalising Royal Bank of Scotland actually improve the supply of credit to UK businesses? That's the question advocates of nationalisation within government – which appears to be a faction led by business secretary Vince Cable – would have to answer if the idea gains momentum. There are reasons to be sceptical.
Full nationalisation would clearly solve the perceived problem that government has "ownership without control" of RBS. The current arm's-length arrangements at RBS could be ripped up and the government would be free to "carve out of it a British business bank with a clean balance sheet and a mandate to expand lending rapidly to sound business", as Cable put it in a leaked letter to David Cameron in March.
If that were to become the plan, though, the government would have to declare one of three things. It could say RBS's current management had failed to spot viable opportunities to lend to good businesses and new managers, which the government would have to provide, would do a better job. Or it could say lending criteria would be relaxed to allow more marginal business propositions to receive a green light. Or, in a similar vein, it could announce that RBS in future will be happy to offer cheaper loans and thus accept a lower return on capital because it will no longer be run on purely commercial principles.
There are obvious problems with all three potential declarations. First, where is the alternative crew of government-sponsored senior loan officers? It was only a week ago that Mark Hoban, the Treasury minister, was applauding RBS's rapid use of the Funding For Lending scheme and hailing this "new deal for business".
Second, is it really sensible for lending criteria to be set by government? Clearly, the UK would hope to avoid the Spanish experience, where local politicians advanced pet projects with disastrous consequences. But central and local government would inevitably be drawn into justifying every decision. Micro-management is not meant to be the Treasury's role, or its skill.
The third point – about RBS accepting a return on capital – raises the most difficulties. Other big banks might protest that they can't compete in a market where the biggest player is a state-directed lender that is willing to accept returns they regard as uneconomic. So, while RBS's stock of loans could be made to go up, Barclays, HSBC et al might retreat to the wings. The net effect could be a fall, rather than a rise, in the overall supply of credit. And that's assuming EU competition authorities would not demand tough remedies to address the state-aid complication.
None of which is to deny there is a problem with business lending. It's just that improving the demand for credit, rather than rejigging the supply, looks the easier problem for the Treasury to address. On that score, business leaders increasingly complain about the lack of dynamism in government. Where are the big, confidence-boosting infrastructure projects that government could fund by taking advantage of the once-in-a-century opportunity to borrow at 1.5% for a decade? They do not require full nationalisation of RBS and the ejection of its management – they just need the Treasury to take the leap rather than fiddle with pasty taxes.