Bloomberg News

Osborne Says It’s Time to Plan U.K. Government Exit From Banks

June 15, 2011

June 16 (Bloomberg) -- Chancellor of the Exchequer George Osborne said it’s time to begin unwinding support for Britain’s financial sector and selling government stakes in banks amid early signs of economic recovery.

Osborne fired the first shot with an announcement that Northern Rock Plc, nationalized in 2008 after suffering the first run on a British bank in more than a century, will be put up for sale. Liquidity programs and credit-support plans that saddled taxpayers with more than 1 trillion pounds ($1.6 trillion) of liabilities at the height of the financial crisis are also being unwound.

“It’s time we started to plan our exit,” Osborne said in a speech to the annual gathering of bankers at London’s Mansion House last night. “Taxpayers today own a large part of the banking system and underwrite guarantees to parts of the rest.”

The comments are the most upbeat assessment by the chancellor since he came to office a year ago and mark a shift away from previous warnings that Britain faces the same fate as Greece if it abandons his fiscal-austerity plans. Osborne’s political opponents say growth remains too weak and the jobs market too mixed to call an end to the crisis.

“I believe that sentiment of cautious optimism has been borne out by events” Osborne said. “The British economy is recovering. Output is growing.”

‘First Step’

Osborne said he has opened the Credit Guarantee Scheme to “early redemption,” allowing banks to exit the government support program that was introduced to increase confidence for inter-bank loans. Unwinding the Bank of England’s Special Liquidity Scheme was another such measure that indicated recovery in the sector, he said.

Going further, the sale of Northern Rock “would be a very important first step in getting the British taxpayer out of the business of owning banks -- and a sign of confidence in the industry,” Osborne said.

It may yet be “several years” before stakes in larger banks such as Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will be sold, the chancellor said. The banks required a 65.8 billion-pound government rescue after the collapse of Lehman Brothers Holdings Inc. roiled financial markets worldwide.

The bidding process for Northern Rock, based in Newcastle, northeast England, will be open to anyone including mutual lenders, and the government wants the sale to spur competition in the banking industry, Osborne said.

Darling’s Move

Savers queued outside branches of Northern Rock in September 2007 after it approached the Bank of England for emergency funding. Osborne’s predecessor, Alistair Darling, took the bank into public ownership in February 2008 after failing to find a buyer.

The government separated Northern Rock Plc, the consumer bank, from Northern Rock (Asset Management) Plc, which is closed to new customers, in January 2010. Northern Rock Plc and U.K. Financial Investments, which manages the government’s bank stakes, hired Deutsche Bank AG in March to advise on options including a possible sale.

Northern Rock posted an underlying pretax loss of 232.4 million pounds in 2010.

In order to increase resilience in the banking system, Osborne said he will back proposals to erect firebreaks around the consumer-banking units of lenders, a plan put forward in April by the Independent Commission on Banking. It’s the first time the chancellor has expressed public support for the idea.

‘Stay Competitive’

The Lord Mayor of London, Michael Bear, warned in his speech at the Mansion House dinner that the costs of banking had to be kept down to prevent damage to Britain’s economy.

“It is in all our interests to help our banks stay competitive and to allow them to operate in a globally equivalent regulatory environment,” Bear said.

The Treasury will also publish draft legislation today that hands powers to the Bank of England to police Britain’s banks in the biggest regulatory overhaul since 1997.

The Financial Regulation Bill will be published for so- called pre-legislative scrutiny, giving lawmakers the chance to pick through legislation that will abolish the Financial Services Authority and transfer most of its powers to the central bank.

Osborne said the broader economic backdrop is showing signs of improving, with a shrinking budget deficit and the “second highest rate of job creation” among Group of 7 nations -- half a million jobs in the last year.

‘On the Mend’

“Britain is on the mend,” Osborne said. “But it’s taking time.”

Osborne “should take some comfort” from employment figures that showed an improvement in hiring in the three months through April, said Danny Gabay, director of Fathom Financial Consulting in London. About 520,000 private-sector jobs have been created in the last year while 143,000 have been lost. Wages have failed to keep up with living costs, Gabay said in a telephone interview.

Osborne said the recovery in Britain has been hurt by a 60 percent increase in the price of oil over the last year, the earthquake in Japan, the fiscal crisis in some European countries and the sluggish recovery in the U.S.

The U.K. economy grew 0.5 percent in the first quarter, canceling out a similar decline in the final three months of 2010.

Osborne’s counterpart in the opposition Labour Party, Ed Balls, said that the chancellor has made matters worse with plans to squeeze the budget deficit more than at any time since World War II.

By weighing on growth, Osborne’s package “is creating a vicious circle” of low business investment, low income and low employment, Balls will say at a speech at the London School of Economics today, according to remarks released by his office.

--Editors: Eddie Buckle, Ben Livesey

To contact the reporter on this story: Gonzalo Vina in London at

To contact the editor responsible for this story: James Hertling at

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