UK Treasury to Increase Public Stake in RBS

by Jordan Yerman | January 18, 2009 at 01:35 pm

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Royal Bank of Scotland (RBS) will convert the £5 billion worth of preference shares sold to the British Treasury into ordinary shares. This will free the bank from having to pay a fixed divdend on each share and, in theory, allow the bank to be more flexible in its lending.

However, such a conversion would give the shareholder (in this case, the treasury) voting rights, which would tip the deal towards full nationalization of RBS.

This will take the bank a step closer to full nationalisation, giving taxpayers a 70% stake - up from 58%.

The move would stop RBS having to pay the 12% fixed dividend that preference shares attract - worth £600m per year - and could allow it to increase lending.

Bloomberg's write-up takes the view that the treasury is doing the banks a favor, but I suppose it depends on whom you ask. In time, the market will recover, and these shares will be worth far more than they are now. Having said that, letting RBS, Lloyds and HBOS fail is not an option.

The Treasury is offering to ditch its preference shares because it is concerned they are choking banks preventing them from lending. Royal Bank of Scotland Group, Lloyds and HBOS Plc agreed to pay a dividend of about 12 percent as part of the government bailout, eight times the Bank of England’s benchmark lending rate.