Monday, 26 July 2010

Green Campaign Builds for RBS’s Capital To Be Used Productively

By Michael Burke

Campaigners have called for the Royal Bank of Scotland to be transformed into a Green Investment Bank to kick start a wave of investment in green technologies The supporting document suggests that it would create 50,000 new green jobs a year, boost the UK economy, reduce the UK's carbon emissions and improve international competitiveness - whilst not increasing the budget deficit. The report was commissioned by pressure group PLATFORM and the anti-poverty campaigners, World Development Movement, who reject the premise that investment in a green economy should be scrapped due to public sector cuts.

By contrast, it has recently been reported that the coalition government may scrap plans to invest public money in a Green Investment Bank. Instead the government may rely on private capital to fund green projects such as wind farms, high-speed rail and electric cars.

Deborah Doane, director of the World Development Movement, said, ‘It would be completely irresponsible and short-sighted to scrap public investment in a low carbon economy. RBS is sitting on billions of pounds from the taxpayer which is going to finance dirty projects often linked to human rights abuses, instead of more productive ends. The money we've invested in RBS should be directed towards green investment. It's a no-brainer: not only wouldn't it cost the taxpayer directly, it would boost the economy and create new jobs in the UK at a much-needed time.’

The idea has received backing within parliament; one hundred and seven MPs signed an Early Day Motion which calls on the Government to use its majority share in RBS to prioritise climate change as a principal concern in RBS's lending decisions.


Room To Invest

SEB has previously argued that RBS, 84% owned by taxpayers, has scope to increase its lending very substantially without endangering its solvency. Indeed, attempts to bolster RBS’s capital beyond those of its High St. rivals simply increase that spare lending capacity

The recent European-wide stress-testing of banks’ balance sheets was widely criticized as insufficiently robust. British banks had previously been put to a more severe test by the Financial Services Authority (FSA), which also published the results.

The key features of those are set out in the table below - it is calculated from the FSA data.

Table 1. FSA ‘Stress Test’ Results for British Banks

The FSA focuses on ‘Tier 1’ capital, mainly shareholders’ funds, as the main buffer against further crises. It projects what the ratio will be in 2011 assuming economic recovery, rising profits and weak lending growth. It also provided a stress test which included double-dip recession, a rise to 12.5% unemployment, a 60% fall in house prices and default by one or more European government. The FSA’s estimate of the impact of all those events combined for each bank is shown in the final column.

Here it is important to note that the banks actually have a huge and growing excess of capital over any prudent requirements, with RBS one of the most awash with the capital that is being hoarded. Previously, the FSA had required Tier 1 capital to amount to 4% of total assets. During the financial crisis in 2008 it altered the requirement so that total capital, Tiers 1 and2, must be 8% of assets . There has been some discussion that new international rules (‘Basle III’) will change the requirement so that Tier 1 capital must be 6% of assets.

Yet all the banks have spare capital way in excess of the expected 6% total. RBS currently has 14.4%. And even in a disastrous set of circumstances it would have nearly double the required international level. Paradoxically, it is the banks’ refusal to lend which is one of the key factors, along with government economic policy, increasing the risk of a double-dip recession and all its negative consequences. Furthermore, the ratios are based on ‘risk-weighted’ assets where values are already deflated by that adjustment for risk. RBS’s actual assets amounted £1,523bn at the end of 2009 .

Given the vast sums in the banks’ balance sheets, even fractional changes in the capital ratios through increased lending would release very large funds for investment. Currently, £100bn in new investment would only entail RBS’s Tier 1 capital ratio dropping to 13.5% from 14.4%. This could provide an enormous economic boost, kick-starting a Green transformation of the economy, creating new jobs, meeting the needs for housing, transport and infrastructure - and not a penny of new government borrowing.

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