LONDON—The fundamental problems plaguing British banks have not been resolved and they may require further recapitalization or even nationalization as a last resort, according to a former U.K. finance minister.
Kenneth Clarke, a political heavyweight in Thatcher's Tory government who served as a minister for 18 years before the Labor Party swept to power in 1997, said that the rescue package agreed at the G20 financial talks has not worked.
The former Finance Minister (Chancellor of the Exchequer) who oversaw Britain's recovery from Black Wednesday recently said another plan was needed for the economy.
“The fact that the public finances are in such an appalling mess and the burden of debt is so bad it is going to make it more difficult to get the banking system actually functioning.” he told the BBC.
Clarke wouldn't rule out the possibility of having to nationalize all British banks.
“Even the governor of the Bank of England didn't rule that out," he said. "I don't advocate nationalization for anything, but putting public capital in if it’s necessary to get the banks to go is something I would support.”
Last Friday British taxpayers became the owner of one of the world's biggest banks, The Royal Bank of Scotland (RBS), with the treasury buying 23 billion shares at 65.5p ($1) each. The shares were offered on the stock market to strengthen the bank’s balance sheet but very few shares were taken up after the share price dropped to 55p (84 cents), leading to a loss of £2.4 billion ($3.65 billion) for the Treasury.
RBS shares will be in the hands of a special new entity, UK Financial Investments Limited, to be controlled by the Treasury.
RBS had just under £2 trillion ($3.0 trillion) of assets and £1.9 trillion ($2.9 trillion) of borrowings, deposits and other liabilities.
Clarke said that it was popular at the moment to abuse bankers and order them to lend money, but commented that in the end it was a waste of time. He did say, however, that he blames the banks for causing the financial crisis.
Banks make money by lending to other people, and we must address the reasons why they are not continuing to do so, Clarke said. The problem, in his view, is due to the risk of all the toxic assets on such banks' balance sheets.
He asserted that the banking system may need some more recapitalization.
“At the moment I would concentrate on guaranteeing lending a proportion of it and doing so carefully,” he said. “But until the banks are going for ordinary commercial lending, having assessed whom the person to whom they are lending the money can afford to repay it, and going for broader lending again you cannot get the real economy functioning. That’s why we are going into such a deep recession at the moment.”