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For the first time in many weeks, bank shares are showing some signs of stability and inter-bank lending rates are starting to ease. But whilst that might be good news for the country - and investors in the UK's banks need to watch out.
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The scale of the government's intervention is unprecedented in the history of the UK's financial sector (see Government to take stake in UK banks). And investors can probably forget cash dividends from those banks taking part in the recapitalisation scheme for years to come. Clearly, with so much state intervention, it's unlikely that the government will remain passive - it's going to want to bring its own agenda to the board rooms of the UK's banks and that may have little to do with commercial reality.
It seems that bankers themselves have yet to fully recognise this. Even Stephen Hester, parachuted in to replace Sir Fred Goodwin at RBS, seems to think that the bank can still be run "with a hard-headed commercial approach." Such attitudes may need to be adjusted. After all, new business secretary Lord Mandelson wasted no time in telling MPs that those banks being recapitalised by the taxpayer should be obliged to lend to small businesses at 2007 levels.
Encouraging soft lending terms for small businesses is hardly a surprising government priority. Small businesses in the UK employ 14m people, and with a general election looming by no later than 2010, the government wants those folk in work, not impoverished by hawkish bankers. But small businesses tend to become big credit risks in a recession. Lending at last year's levels, then, will probably mean loosening credit criteria. A similar point can be made about mortgage lending. While such politicised lending might help keep the economy moving, it could also leave the banks with a bad debt burden that significantly outlasts the current crisis.
That's all the more ironic, given that it was lax lending that got us to this point. Nor is the creation of a big book of politically-directed lending going to facilitate a smooth exit for the Treasury when the crisis has finally passed. How will the government sell shares in banks whose balance sheets it has so poisoned?
On that basis, investors might wonder whether to leave the part-nationalised banks alone, and concentrate instead on HSBC and Standard Chartered. Not only will they be free to pay dividends as they see fit, but both declare dividends in dollars - which will benefit UK shareholders because of the weakening of sterling against the dollar. Set against that, both institutions face other issues, such as heavy exposure to emerging markets and, in the case of HSBC, US sub-prime lending.
John Adams is the IC's banking correspondent. For more on the banking crisis, see www.investorschronicle.co.uk/bankingcrisis.
For readers comments and questions about the crisis, see the Your Opinion page.
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