A thumping nationalisation here, the odd preferred holding there – Royal Bank of Scotland is just one of dozens of banks now being taken over by governments around the world. Prejudices against state control may be weaker these days following the right-royal hash made by the private sector, but no one should forget for a second that public institutions have historically been appalling allocators of capital. Partly nationalised banks, as China is now learning to its cost, have often been just as bad.
The trouble when state and private interests collide is that banks suffer crises of purpose. It is not enough to say both sets of shareholders want to maximise total returns. Even private investors disagree on the best deployment of capital. But a government’s holding has to be consistent with wider public policy objectives. For example, the new US administration hopes to add 2.5m new jobs. Yet rolling heads at Citigroup, of which Uncle Sam may one day own almost 10 per cent, are nearing 80,000.
Equally, governments now want the newly bailed out banks to extend credit as liberally as they can. But corporate lending is almost always loss-making after risk is taken into account. If banks cannot flog the ancillary investment banking products to make such loans worthwhile – tricky right now – they will push back. And what if a bank wants to build its client base by ramping up overseas lending at the expense of the government’s home turf?
Then there is the tricky issue of compensation, not just for overpaid executives sitting beside their public sector masters, but also for the lowliest employees. Inherent conflicts of interest will create perverse incentives that destroy value. How, for example, will UK banks under de facto state control reward managers that are tacitly encouraged to pump out loans to stretched homebuyers and failing businesses? State capitalism will not be pretty.
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