A poisoned chalice

 

Why would the Government wish to take ownership of part or all of Ulster Bank, a subsidiary of the Royal Bank of Scotland (RBS) in which the British government holds an 81 per cent stake? The suggestion – which emanates from financial and political circles in London – that the UK treasury might offer part or all of Ulster Bank in exchange for the British assets of the National Asset Management Agency (Nama) has met with an understandably sceptical response, not least from the Department of Finance.

The department has denied that any approaches have been made to it, and also said that any such proposal was not worth considering. Certainly, what may make some financial or political sense in London makes much less in Dublin, and any offer if made – along the lines indicated – would almost certainly be refused by the Government.

Ulster Bank, which employs 6,000 people and serves some two million personal and business customers, operates in both parts of Ireland, where it is the third largest bank. The bank, like most of its domestic peers in the Republic, faces major ongoing financial difficulties – with losses of £1.04 billion in 2012. Ulster Bank remains a very heavy burden on its London parent. RBS has already put more than £15 billion in capital into its Irish affiliate to offset the huge loan losses incurred by Ulster Bank after the property bubble burst.

The British government is anxious to return RBS to private ownership as soon as possible, but before it can do so some restructuring of the bank’s operations will be required. And that partly explains the mooted debt swap plan involving Ulster Bank and Nama’s UK assets and loans. For the Government, the reasons to reject any such offer – if formally made – are clear-cut. The State has already seen a banking crisis evolve into a sovereign debt crisis, one that ended in a financial rescue by international lenders. So for the Government to take yet another struggling bank into State ownership – joining AIB, Permanent TSB, and Irish Bank Resolution Corporation (formerly Anglo Irish Bank) – is not a credible or affordable option.

The Government is trying to reduce not increase the State’s monopoly ownership of banking. The addition of Ulster Bank would serve to raise rather than reduce the State’s exposure to financial risk. It would neither be acceptable to the relevant competition authorities, nor indeed to the troika. And it would certainly not impress the financial markets on which Ireland depends for its future borrowing requirements if, as expected, the State leaves the bailout programme later this year. Nama’s portfolio of assets and loans in the UK are, it would seem, of higher quality and value than those in Ireland. To swap those as part of a deal to take on another loss making Irish bank carries very high risks and few if any rewards.