Treasury imposes restrictions on bailed-out banks as government takes on more risk

Royal Bank of Scotland (RBS) and Lloyds Banking Group have received £40 billion more in taxpayers' money to shore up their finances ahead of an EU-mandated break-up of their businesses.

In return, the Treasury announced an agreement whereby staff earning more than £39,000 a year will be banned from receiving cash bonuses. Members of the boards will have their bonus payments delayed until 2012.

The move was criticised by Stephen Hester, the new chief executive of RBS, who claimed the bank would have difficulty attracting and retaining the best staff. He also warned RBS would be forced to find alternate ways to compensate employees, such as payment in shares or deferring earnings.

"We are aware that we need public support, given our position. However, the surest way for the taxpayer to see value for its support is if RBS is able to have very good people and compete in its markets. We must be competitive or we will not return value to the taxpayer," Hester said. "We are here by courtesy of the British taxpayer, so I am not going to cavil or carp in any way. But we do feel bruised. We do feel that life has in many ways been made more difficult for us."

RBS has already received £20 billion in bailout funds - representing a 72 per cent government ownership of the bank - and will now have a further £25.5 billion pumped into its coffers, increasing the public share to 84 per cent. RBS has also elected to stay in the government's Asset Protection Scheme (APS) which guarantees the bank insurance against "toxic" debt. It intends to insure £282 billion of bad loans through this scheme.

Lloyds, by contrast, has persuaded the government that it does not need to remain in the APS, incurring a £2.5 billion penalty, and instead will attempt to raise £21 billion in funds to avoid the government increasing its stake in the bank from the current level of 43 percent.

Part of Lloyd's rationale is that EU penalties imposed yesterday were "significantly lower" than they would have been if it had continued its participation in the APS. A Lloyds spokesman said: "The board believes that [leaving the APS] will significantly reduce the severity of the final terms of the restructuring plan required by the EC to limit distortions of competition resulted from the aid received by the group."

Nevertheless, the lender will still require a further £5.7 billion of taxpayer investment in addition to the £17 billion paid out earlier.

Alistair Darling insisted the taxpayer would eventually get repaid. "One of my priorities is to make sure the taxpayer does get its money back," he told GMTV. "It may take years before we know whether we are going to get our money back but a lot of it will come back. As a result of what I am doing today we have managed to get rid of about £300bn of liabilities."

Shadow chancellor, George Osborne, was critical of the plans: "A year ago the government injected £37bn into the banking system and claimed that they had not only saved the banks but saved the world. But today's £39bn bailout is even larger than the first, and their key banking policy of an asset protection scheme has had to be rewritten."

Yesterday, the European Union ordered both government-assisted banks to sell off sections of their business to comply with competition laws.

RBS is required to sell a host of subsidiary insurance companies, parts of its Global Banking and Markets investment banking business, as well as 318 UK branches. There are fears that up to 6,000 jobs may be lost.

Lloyds was less affected as it left the APS, but must sell 600 branches, its internet bank and reduce its assets by £181 billion.

Post your comment

Please note: you will need to login or register before you can comment on the website