RBS accepts stricter government control

EDINBURGH – Citizens Financial parent Royal Bank of Scotland, facing record losses, has moved one step closer to full government control. In exchange for British Treasury guarantees against losses on the bank’s toxic debt, RBS has agreed to accept strict government guidelines regarding the amount the bank lends and the terms of those loans.
“We’ll be one of the first guinea pigs,” CEO Stephen Hester said in a conference call about the deal, details of which are still being ironed out, according to Bloomberg News.
Hester took over in October from former CEO Sir Fred Goodwin, when RBS accepted bailout money under U.K. government’s initial equity-purchase scheme. (READ MORE) A month later, the government took a majority stake in the ailing bank, after RBS attempted to raise capital by issuing new shares, but the offer failed to attract investors. (READ MORE)
Meanwhile, the bank has been raising capital by selling assets, including its 10.8 billion shares in Bank of China Ltd., which RBS put on the block last week. (READ MORE)
Now, RBS has pledged to boost its lending to British companies by at least 6 billion pounds (about $8.7 billion at the current rate of exchange), after the government agreed to trade its preferred shares for ordinary stock, a move that will save the bank 600 million pounds per year in dividend payments.
The deal is part of a second round of bailouts by the British government.
The new deal is one of “mutual responsibility,” said Prime Minister Gordon Brown, who expressed anger that the earlier cash infusions did not succeed in freeing up credit. Banks accepting a share of the latest $100 billion pounds in rescue funds must agree to “have specific and quantified lending commitments that will be binding and externally audited,” according to the British Treasury.
But many were critical of the new plan. “The absence of detail on this is blinding, it is just incredible,” Peter Hahn, a fellow in finance at London’s Cass Business School, told Bloomberg News. The U.K. Shareholders Association described the plan as “creeping nationalization,” a viewpoint that appeared to be shared by many investors, as RBS shares plunged 67 percent yesterday in London trading.
The latest news follows the announcement Friday that Chairman Tom McKillop will step down in April to be replaced by Philip Hampton, the chairman since 2004 of J Sainsbury Plc. Hampton started work at RBS yesterday, according to Bloomberg News. He will serve as deputy chairman until McKillop’s departure.
RBS also said it may face full-year losses as steep as $41 billion for 2008.
Royal Bank of Scotland Group plc (LSE, NYSE: RBS), based in Edinburgh, Scotland, is the parent of Citizens Financial Group Inc. The Providence-based commercial bank holding company and its subsidiaries operate 1,600 branches in 13 states, under the Citizens Bank and Charter One brands, plus non-branch offices in about 40 states. Additional information is available at CitizensBank.com or www.rbs.com.