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Vickers report: taxpayer may never profit from RBS stake, analysts warn

Banking commission call to ringfence Royal Bank of Scotland’s high street operations likely to force it to cut investment banking

The taxpayer will find it more difficult to recoup the £45bn ploughed into Royal Bank of Scotland to stop it collapsing after the 2008 banking crisis because of the changes proposed by the Independent Commission on Banking (ICB), leading analysts warned on Tuesday.

The demand to erect a “ringfence” around RBS’s high street banking operations is likely to force the bailed out bank to shrink its investment banking operation, according to UBS, which acts as broker to RBS.

“While the ICB report makes almost no consideration of the lost value of the government’s shareholding in RBS, we believe the lost earnings will represent a permanent diminution in the value of the government’s stake,” the UBS analysts said.

RBS shares rose over 5% to 21.88p on Tuesday – equating to a £26bn paper loss for the taxpayer, which paid an average of 50.2p for its 83% stake in the bank.

UBS also sees implications for other high street banks from Sir John Vickers’ report on Monday, which also called for banks to hold more capital to bolster their financial strength, up to as much as 20% of assets measured by their riskiness.

“Our first take suggests Barclays is incentivised to break itself up; RBS to shrink materially further; and HSBC to leave. Lloyds should be the best positioned remaining UK bank; while Standard Chartered may escape the unnecessary demands of the ICB,” UBS said.

The UBS analysts noted that the value of RBS has fallen since the middle of August when the market began to digest the implications of ringfencing high street banking.

“Holding 90bn shares in RBS, each penny off the share price represents £0.9bn in lost value [for the taxpayer's stake]. Since August 5, RBS has lost close to one third of its value, or 10p a share – a cost of £9bn to the Treasury,” they said.

The ICB final report makes reference to the government holdings in the two bailed out banks, RBS and Lloyds, and acknowledges the “vulnerability of current share prices” but argues this is a reason to make the industry more robust.

“There may be some financial impact on the government finances from a reduction in the value of the affected banks, due to the fact that not all costs represent a subsidy. Nonetheless, any impact on the valuation of the banks in which the government has a shareholding would be more than offset by the long-term fiscal benefits.”

The ICB estimated its recommendations would cost between £4bn to £7bn a year and reckons that any losses from falls in bailed out banks’ share prices would not affect that estimate. “At any rate, the ultimate costs to the economy of any impact on the government shareholdings would not be additive to the cost estimates, which assume that all the costs flow through to borrowers.”

UKFI, the body which controls the taxpayer stake in the bailed out banks, admitted in July that the Vickers report was causing some difficulties in attempting to sell down the taxpayer holdings. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds