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The People’s Bank is in the red…

June 23rd, 2011 Posted in Banks, Liberal Democrats by

I confess, like most commentators on this matter, I’m less than thrilled by the idea of the People’s Banks – giving everyone a small stake in the  nationalised entities RBS and Lloyds.

Whilst I can see the populist appeal, I’m not clear why it’s better to get our money back through an administrative equivalent of the national ID card database. Rather than just selling them off and reducing the debt. In fact it might guarantee we don’t get the money back.

The government for example may be wise to sell the banks at a loss (to avoid worse losses later), or break them up in order to maximise value. This scheme, holding shares in trust, would prevent the former, and make the latter more difficult.  

It’s also not clear to me why a body with 46 million shareholders (or more) would be any better run (fiscally) than the nearest equivalent, the Treasury. With a national referendum required for every AGM, the temptation would be for bank governance to be overtaken by activism on a raft of single issues unrelated to the business of running a good bank. Positions on the Board would become attractive targets for publicity seekers. Dull  but talented executives actually good at making money, if current public attitudes in polls are typical, would be regularly sacked on the grounds of ‘being greedy bankers’.

A problem particularly likely during the period the shares remain in trust. The shareholders, at that point have few incentives to be responsible. They own a share of nothing.

This is not a problem generally true in with share ownership. If you’re an investor with something to lose you care passionately about whether or not your investment has just voted cut rates to the point of making a loss in the name of fairness, loan money to high risk small businesses with a good lobby, or commit 0.7% of revenue to CSR.

Banks are financially successful because they are not run like democratic governments. Banks mostly target and invest in probable success. Governments, for reasons of equity, fairness or other political values, tend to do quite a lot of the exact opposite.

Turning a bank then into a proxy for government is not necessarily going to lead to a windfall for anyone. And if that doesn’t happen, the long-term political dividend will be negative.

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