World and Nation

Fall of British Bank Echoes Across the Atlantic

Is partial nationalization the cure for America’s ailing banks?

The Obama administration’s plan to take an increased stake in Citigroup echoes the British government’s experience with one of its biggest banks, the Royal Bank of Scotland, a once highflying bank that is now nationalized in all but name only.

As with Citi, Britain’s involvement with RBS grew in fits and starts. The government started with a minority holding last fall, when it pulled the bank from the brink of collapse, but continued to tighten its grip as the share price eroded.

Today it owns a 68 percent stake, allowing it to exert de facto control over bank management — which was replaced — as well as in lending and strategic decisions.

But such a policy, while cheered by those who advocate a more direct and forceful route to healing sick banks, is by no means a panacea, as the problems at RBS show.

“The beguiling certainty of nationalization will make everyone feel good for 24 hours,” said Howard Davies, the director of the London School of Economics. “But what do you do next? You have to have an exit strategy.”

This week, the bank will announce a 28 billion pound loss, the largest in British corporate history, as well as a plan to split itself into a healthy bank focused on core lending in Britain and a so-called “bad” bank comprising assets it will seek to sell off within five years. Citigroup is engaged in a similar strategy. RBS is also looking to shed more than 200 billion pounds worth of toxic assets.

The dismembering of the bank’s far-flung international operations and a severe retrenchment of its wholesale banking operations, will result in the elimination of about 20,000 jobs, the bank is expected to announce.

Royal bank of Scotland’s stock price has rebounded lately, but it continues to trade at only about 20 percent of its book value — below that of Citigroup.

But for the British economy, the fortunes of which have been tied tightly to its once vast financial services industry, concerns about the appearance of nationalization is less important than preventing a banking collapse.

By absorbing a total of about 1.5 trillion pounds in liabilities from RBS and Lloyds Banking Group — another troubled bank — on to its own balance sheet, Britain may have prevented a banking failure.

At the same time, the government has raised the odds that its own finances may buckle.