UK: Mandelson backs state-run bank

Mandelson backs state-run investment bank

The Business Secretary, Peter Mandelson, has told senior colleagues that he backs plans for a state-run investment bank that would use public funds and private capital to back small business and large-scale UK infrastructure projects.

By Kamal Ahmed and Philip Aldrick
Telegraph, 20 Feb 2010

The new bank would be modelled on the KfW Bank in Germany, which provides funding for banks to loan to small businesses as well as capital for major projects. Normally operating banks across the continent use KfW as a source of cheap finance e_SEnD available to it because of its guarantee from the German government.

Lord Mandelson has met senior executives of KfW twice in recent months, once in London and once in Berlin, to discuss how such a bank could work in the UK. Plans are now being looked at by the Treasury team with a view to making some form of announcement in the Budget.

Senior Whitehall sources have confimed Lord Mandelson's enthusiasm for the project, saying that, although the Business Secretary does not want the state to "pick winners", a state-run bank could create funding streams in areas that the finance sector might otherwise ignore.

The news comes as Britain's two banks with the biggest government stakes, Royal Bank of Scotland and Lloyds Banking Group, prepare to announce losses next week. The Treasury has so far failed to agree RBS's planned £1.3bn bonus pool until a thorough check of the payments is completed.

The bank had hoped to announce its bonus arrangements early this week to give Stephen Hester, the chief executive, a platform at the annual results on Thursday to lay out his vision for the bank after a difficult first year. By delaying sign-off, the bonus issue threatens to overshadow the bank's numbers, which are expected to show a £5bn loss.

Barclays is believed to have thrown a spanner in the works last week when the chief executive, John Varley, and president, Bob Diamond, chose to forgo multi-million pound bonuses, despite reporting record profits.

UK Financial Investments, the body managing the taxpayers' bank stakes, and is ultimately responsible for corporate governance, is now thought to be putting pressure on Mr Hester, and Eric Daniels, Lloyds Banking Group chief executive, to follow suit.

Appearing on The Andrew Marr Show on the BBC this morning, Lord Mandelson is expected to call for restraint from both men, signalling that he agrees with the approach from the Barclays executives.

"The clear moves by banks to exercise restraint in relation to bonuses is to be welcomed as an acknowledgement of how the tax-payer has supported the banks," Lord Mandelson will say.

Mr Daniels is entitled to an annual bonus of £2.3m on top of his £1.04m salary. Mr Hester can earn a £1.6m bonus, on top of his £1.2m salary, if targets are met. Both bonuses would be paid in shares that can be clawed back and will not be received for three years.

Treasury officials are also concerned about the way the bonuses will be accounted for. RBS is expected to reveal that the compensation ratio for its investment bankers will be the lowest of all UK banks, at about 28pc – well below the 38pc declared by Barclays last week.

The ratio will be used to demonstrate that the bank is showing restraint. The investment bank is expected to report record profits, helping recover some of the £13bn of losses in the non-core division – the group of businesses that are being wound down and sold off that carry the bulk of RBS's legacy problems.

Mr Hester has argued that bonuses must be paid top retain talent and that it is bank policy to pay "the minimum we can get away with in the market place".

This weekend, it is believed that another senior executive has left the bank after The Daily Telegraph revealed last week that key executives had gone from the UK. Steve Stanley, chief economist of RBS's US securities division, is to quit.

Under international accounting rules, the greater the proportion of bonus that is deferred, the less the bank has to declare in the current numbers. RBS is deferring all bonuses for staff on salaries above £39,000 and paying them all in shares, which observers said may flatter its ratios.

In addition, the bank has deferred last year's bonuses by a further three months. Those awards will now pay out in June, potentially allowing RBS to avoid declaring last year's bonuses in the current figures and further flattering the ratios.

Bankers will be able to cash out hundreds of millions of pounds in June. Last year’s awards, made in the bank’s subordinated debt, can be converted into cash in June and one third this year’s share-based bonus, or £400m, can be sold.

One senior auditor said: “The more that is deferred, the less that is taken as staff costs this year. Potentially, if the whole bonus is contingent on future service, nothing need be declared.”

RBS confirmed the effect of the deferrals, but declined to comment on the deferrals of last year’s bonuses and claimed: “There will only be a marginal impact.”

It is thought the arrangement will lift RBS’s effective ratio a little above 30pc.