Richard Davies

Economist

Banks and Brexit

Sell up, and save the City

The Times

Banks, Brexit, finance, exchange rates

For the City of London an uncomfortable anniversary is fast approaching. December 1, 2008 was the nadir of British finance, the day that Alistair Darling put £15 billion of public money into Royal Bank of Scotland to prop it up. This was a bank founded in 1727 and by then the biggest in the world. As the losses mounted, the bailout money rose, hitting £45 billion by the end of 2009. Eight years on, the British taxpayer still owns more than 70 per cent of RBS. It is time to sell.

The bailouts of RBS and Lloyds were essential, given the acute stresses that autumn: financial firms around the world were toppling. They were such important providers of mortgages and business loans that failure would have been catastrophic. But the emergency has long passed. Today Britain’s banks hold far more loss-absorbing capital. They are smaller and safer. But, despite this progress, our banks and state are intertwined. It is embarrassing — the kind of thing to expect in an emerging market, not an advanced economy.

While there are plans to privatise Lloyds, Philip Hammond’s autumn statement confirmed that a sale of RBS looks unlikely any time soon. The problem is the value of the shares. After some sales last year the UK taxpayer’s stake — 8.4 billion shares — was bought for close to £37 billion, or 440p a share. Yesterday the shares were trading at about 205p. Selling would raise about £17 billion, half the amount put in.

Situations like this happen all the time for investors, and drive them to make a common mistake. Economists call it the “disposition effect” — the tendency to hang on to stocks that have fallen in value in the hope that they will eventually return to the black. Study after study shows that this loses money. It is better to recognise the loss, sell and reinvest. The point is that shares should be held because of their future prospects, not to recoup past losses.

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