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The Chancellor changes tack on Lloyds share sale whilst plans to return RBS to the private sector remain firmly on hold.

The Chancellor of the Exchequer, Philip Hammond, has announced that the planned public sale of the government’s remaining 9 per cent shareholding in Lloyds Bank has been abandoned. The government will, instead, sell its remaining stake in the bank in tranches of private sales to City institutions and pension funds.

At the height of the financial crisis in 2008 the bail-out of Lloyds required government funds of £20 billion. Some £17 billion has already been recouped by earlier sales of the government’s shares in the bank.

The Chancellor cited market volatility as the key reason for abandoning the sale to the public. Clearly the government is concerned that if a fall in share prices occurred at the time of the planned sale then small investors would be exposed to at least ‘paper’ losses on their investments in Lloyds shares.

Certainly Lloyds’ share price has not joined the rally in the FTSE indices since the Brexit vote in June. Whilst the FTSE-100 is now close to its record high Lloyds share price has remained largely unchanged since the day after the referendum vote. At the time of writing Lloyds share price is 52p compared with 77p a year ago.

By contrast there is no early prospect of the government recouping its huge (73%) stake in the Royal Bank of Scotland (RBS). The bank was the subject of a £45 billion bail-out during the financial crisis that dwarfed even the support that had to be availed to Lloyds.

RBS is facing the prospect of a huge fine by the US Department of Justice for its role in the mis-selling of mortgage securities that was the chief source of the financial crisis in the late 2000s. Some analysts are forecasting a fine of some $13 billion (around £10 billion). Such predictions would appear to have substance given that Deutsche Bank has just been fined such a sum for its role in the sub-prime mortgage securities debacle.

A fine of this scale would dash prospects of a return to profitability by RBS and hence postpone, perhaps for years, the sale of the Government’s stake in the bank. In addition to the prospect of a huge US fine RBS is also struggling with its plans to sell of its Williams and Glyn branch network.

So the prospect is that within months the government will have exited from its position as a shareholder in Lloyds Bank whilst its shareholding in RBS seems set to continue for many more years.

Martin Upton

Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

7th October 2016

The establishment and activities of the Open University’s True Potential Centre for the Public Understanding of Finance have been made possible thanks to the generous support of True Potential LLP. True Potential has committed to a five-year programme of financial support for the Centre. Views expressed by True Potential PUFin may not reflect those of True Potential LLP.

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