Breakingviews- Justin Welby’s UK banks sermon welcome but flawed

Tue Apr 23, 2013 4:38pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, April 23 (Reuters Breakingviews) - Justin Welby’s sermon on UK banks is welcome, but flawed. Britain’s new Archbishop of Canterbury has called for a big UK bank to be split up. Welby’s financial literacy means his views are, to an unusual degree, worth listening to. Sadly, the time for penance for the likes of Royal Bank of Scotland (RBS.L) is probably already past.

Splitting lenders like RBS into good and bad bits, as Welby advocated in a speech on April 22, is superficially attractive. RBS’s best businesses like its UK retail arm make strong returns, but the overall group is still in the red, dragged down by past misdemeanours and over 80 billion pounds of loss-making non-core and Irish assets. A separation would free up the good part to lend, which might help the country out of what the archbishop not unreasonably termed a "depression".

This kind of bracing, authoritative radicalism is appealing. But the costs of clefting RBS in twain are great, and the benefits worryingly nebulous. It would cost taxpayers over 6 billion pounds to buy out the 19 percent of RBS the state doesn’t own. A suitably harsh Old Testament valuation of the bad bank would require a lot more capital.

It also seems a weird time to split RBS, which is already four years into a five-year programme to wind down its 258 billion pounds of toxic assets. And a breakup might not lead to more loans, to judge by the underwhelming performance of the UK’s Funding for Lending scheme. The lack of demand in the economy probably requires a more radical direct stimulus, such as allowing the Bank of England to buy securitised small business debt, or creating a dedicated small business bank.

Before his religious calling, Welby toiled as a financial executive at an oil company. The mix has given him a persuasive vision of finance. As he suggests, bankers should renew their links with the communities they serve. Smaller regional banks could, if tightly supervised, be safer and easier to resolve. Banks should have more equity.

But such remedies require investors who are less short term - and more ascetic. Welby might want to address this in his next sermon.

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CONTEXT NEWS

- At least one of Britain’s major banks should be broken up into smaller regional lenders, the Archbishop of Canterbury said in a speech on April 22.

- Justin Welby, who also sits on the Parliamentary Commission on Banking Standards, said one of the big banks should be recapitalised and split up. He also backed the idea of transparency via a "good bank, bad bank" system.

- Reuters: Church head, on bank reform panel, calls for a bank breakup [ID:nL6N0D928W] - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Edward Hadas and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS WELBY/

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