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Capital shortfalls eclipse bank reprivatisation talk

The chancellor's Mansion House speech was short on detail regarding selling the government's shares in RBS and Lloyds - unlike regulators' assessments of banks' capital adequacy

Bank shareholders may have been eagerly awaiting the chancellor's Mansion House speech last night for signs of the government's strategy for selling its stakes in RBS (RBS) and Lloyds (LLOY). But it was news from bank regulators the next day - of a hefty combined sector capital shortfall - that looks of more immediate significance for bank investors.

Indeed, the chancellor's speech contained little really new or detailed thinking. With Lloyds, George Osborne says the government is "actively considering options for share sales". Moreover, and despite saying that he has no "pre-fixed timescale", investors should expect action sooner rather than later - given that the shares, at 61.4p, trade roughly at the government's average buy-in price. An institutional placement, followed by some form of retail offer, looks like the government's preferred method of disposal - so last week's suggestion of a mass distribution to taxpayers, for free, from pro-Tory think tank, the Policy Exchange, appears to have been rejected.

With RBS, however, there was some surprise - Mr Osborne actually seems genuinely open minded about considering plans to split the lender into a 'good bank', with the best assets, and a 'bad bank', containing the dross. He has promised a review and a decision by the autumn. But, as the government doesn't own all of RBS, and as Mr Osborne isn't prepared to "put more taxpayer capital into RBS", then splitting the bank won't be easy and could even delay a share sale. It's not a route that has impressed the City. "Chancellor Osborne has missed a great opportunity to kill such value-destructive talk stone dead," said analyst Ian Gordon of broker Investec Securities. "Any hope of a near-term sell-down of (part of) the government's 81 per cent stake is de facto abandoned, and poor RBS looks set to remain a political football."

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