Ten years after the crisis that led to the bailout of the Royal Bank of Scotland (RBS), the Government still owns 62% of the bank. It could be another seven years before the last publicly-owned share is sold. Here we explore why.
In the course of 2008, as the financial crisis gathered speed, RBS shares lost 87% of their value.
The most eventful day for RBS that year was 7 October. On that Tuesday morning, RBS’s CEO, Fred Goodwin, was giving a presentation about the bank’s opportunities ahead. By the time he’d finished speaking, the share price had plunged 35%. Later that morning, the Chairman of RBS, Sir Tom McKillop called the then Chancellor, Alistair Darling, to tell him RBS was going to run out of money the same afternoon. Darling asked the Bank of England to make emergency loans to RBS, and tens of billions of dollars and pounds were made available covertly.
As speculation mounted that the Government was going to buy fresh shares of RBS (to ‘recapitalise’ it), the bank stated it was making no such request from Government. A long night at the Treasury ensued for Goodwin and fellow CEOs from the largest UK banks. Goodwin initially resisted the bailout that would end his tenure at the helm of RBS, but eventually relented in the early hours of 8 October 2008. That morning the Treasury announced it was making £25 billion of capital available to the banks, £20 billion of which would turn out to be for RBS.
Following a second bailout in December 2009, taking the total to £46 billion, the public found itself owning 84% of the bank.
The road to recovery
Why, ten years on, does the British public still own 62% of RBS? In short: nobody likes losses, including the Government.
After the bailouts, the RBS share price fell below what the Government paid, and has not come anywhere near since (see chart below). Why has the share price remained low? Well, RBS hasn’t been a very attractive investment since it crashed. It made a £24 billion loss in 2008, and has been loss-making every year since, until 2017. This 12 October 2018, RBS finally pays its first dividend to ordinary shareholders since 2008. RBS is also a very different bank today: 70% smaller by balance sheet size.
The Government had hoped the bank would return to steady profits more quickly, and that the share price would rise as a result. This hasn’t happened yet. The Government could decide to wait for as long as it takes for the shares to rise above what was paid in 2008-2009, but waiting is not free: there is a ‘financing cost’ to holding the shares. For example, Government funds tied up in RBS shares could be used instead to reduce the national debt, or to invest in infrastructure.
The chart below shows the difference between what the shares are worth and the cost to the public purse. The cost to the Treasury of RBS shares grows steadily as time passes, once financing costs are included. This is shown by the dark grey line on top. Holding the shares until the price rises above cost means waiting for the green line to catch up with the dark grey line (minus future dividends). It might take many years, and there is no guarantee it will ever happen.
Source: Bloomberg; Library calculations based on NAO report, The first sale of shares in Royal Bank of Scotland (July 2017)
Note: Dividends received are deducted from cost
And so, there are no simple solutions. The Government started selling at a loss. It sold at 330p per share in August 2015 and 271p per share in June 2018, compared with a cost per share of 499p (excluding financing).
Government plans laid out in March 2018 are to continue selling around £3 billion worth of shares every year until 2022-23. At that rate, the last RBS shares will be sold in 2025 – 17 years after the first bailout.
For now, the Office for Budget Responsibility (OBR) estimates that saving RBS cost the public £27 billion. The final figure will depend on how the share price does in the next few years. If the shares go up faster than financing costs, the loss will be smaller; it will be larger if the shares continue to languish.
For more information about the rescue of RBS and other banks, read our briefing about the Bank rescues of 2007-09: outcomes and cost.
Federico Mor is a Senior Library Clerk at the House of Commons Library, specialising in business and finance.