Editorial: The state should not own banks

If the Chancellor’s Mansion House speech is as expected, George Osborne will confirm next week that the Government is to start the process to dispose of the state’s stake in Britain’s banks before Christmas. The move would be a timely one.

True, UK Financial Investments was set up specifically to keep the management of the Exchequer’s interest at arm’s length from ministers. But public angst over bonuses nigh demands that ministers interfere at every annual general meeting, and to pretend that UKFI allows it to engage as any other shareholder is laughable. The same is also true on such issues as the provision of small business loans or mortgages for first-time buyers. Thus, there is a clear conflict of interest here that does not assist the effective restoration of the banking industry.

In the case of Lloyds, the bank’s shares are trading at a price close to that at which the taxpayer bought them. The Government may still have to accept a small loss – as a large shareholder selling a big parcel of shares, it will have to sell at a discount. That should not deter it from pressing ahead with a straightforward market sale, however.

Royal Bank of Scotland is a more complex proposition and the size of the state’s interest – more than 80 per cent of the bank’s stock – demands more creative thinking. A citizen share scheme of the kind familiar from the “Tell Sid” campaign of the 1980s makes more sense here. The stock may be underwater when the sale process begins, but a system whereby the public purse recoups its investment and the individual takes any profits – such as has been suggested by the Policy Exchange think-tank – has much to recommend it.

A pre-election share giveaway might look like naked politicking by the Chancellor. But the imperative must be to get the Government out of the banks as soon as possible. Giving the public a stake in the success of the industry might also start to repair a relationship that has become dangerously frayed.