Quasi‐Nationalisation in the UK Banking Crisis: A Problematic Policy Option

• DOI: http://doi.org/10.1111/faam.12065
• Author: Elisa Henderson
• Date: 01 November 2015
• Published date: 01 November 2015

Financial Accountability & Management, 31(4), November 2015, 0267-4424

Quasi-Nationalisation in the UK

Banking Crisis: A Problematic

Policy Option

ELISA HENDERSON∗

Abstract: The systemic banking crisis in 2008 led to the quasi-nationalisation

of two UK listed banks: The Royal Bank of Scotland and Lloyds Banking Group

(National Audit Office, 2010). Using property rights and agency theory as the

theoretical frameworks, this paper analyses whether the quasi-nationalisation of

these banks has been successful. It is argued that as a rescue mechanism, quasi-

nationalisation was a positive development. However, questions arise over its effect as

an instrument of banking reform. The State’s arm’s length approach to management

represents a lost opportunity to change the culture of profitability over people that

contributed to the banking crisis.

Keywords: quasi-nationalisation, banks, property rights, agency theory, UK

INTRODUCTION

In 2008, the systemic distress in the UK banking system led to the quasi-

nationalisation of two major banks: the Royal Bank of Scotland and Lloyds

Banking Group (National Audit Office, 2010). Alongside significant Government

ownership, these banks also continued to have shares traded on the Stock

Exchange. The quasi-nationalisation presented uncharted territory for the

banks, encompassing additional layers of accountability which are a feature

of public ownership (Luke, 2010). Designed as a temporary crisis response, the

Government sold a small proportion of the Lloyds Banking Group shareholding

∗The author is from the University of Edinburgh Business School. She gratefully acknowledges

the comments of the anonymous reviewers, Irvine Lapsley, Ingrid Jeacle, and the participants

of the New Thinking Group 2012.

Address for correspondence: Elisa Henderson, University of Edinburgh Business School,

29 Buccleuch Place, Edinburgh EH8 9JS, UK.

e-mail: Elisa.Henderson@ed.ac.uk

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at a price in excess of the original investment in September 2013 (UKFI, 2013a)

and March 2014 (Lloyds Banking Group, 2014). RBS’ repatriation to the private

sector remains unlikely in the short term (UKFI, 2014). This paper considers

the policy of quasi-nationalisation in the UK banking sector. Despite efforts to

improve accountability, the paper argues that the banks continue to privilege

profitability over customer service. The paper contributes to the literature by

applying the theoretical understanding of property rights and agency theory to

a novel political context. It also contributes to the repeated calls for accounting

research into the global financial crisis (Arnold, 2009; British Accounting Review,

2012; and CIGAR, 2013).

The paper proceeds as follows. The quasi-nationalisation process is outlined

in the following section. The third section contrasts the theoretical perspectives

of property rights (Alchian, 2008; and Alchian and Demsetz, 1973) and agency

theory (Fama and Jensen, 1983; and Jensen and Meckling, 1976). The fourth sec-

tion outlines the status of quasi-nationalisation and the corresponding research

design to analyse it. The fifth section provides analyses of the Government

rescue package under property rights theory (PRT) and agency theory.

The analysis under PRT supports the use of quasi-nationalisation to remedy

the immediate crisis. Government ownership benefits from the style of

monitoring retained by private sector investors. Nonetheless, markets and

auditors failed to anticipate the crisis. The State aims to cushion the economic

downturn via bank lending. However, the benefit of influence is eroded in the

longer term as commercial ideals prevail. Finally, the PRT analysis considers the

diffusing effect of State-driven targets to the wider banking industry, increasing

the acknowledgement of banking’s responsibility to its customers.

In the second part of the analysis, agency theory challenges the model of

quasi-nationalisation as an effective reformatory measure. Market discipline is

muted in current conditions, suggesting a need to incentivise bank directors away

from share price and profitability measures of success. Scandals occurring at the

quasi-nationalised banks, including PPI mis-selling, IT outages and exploitative

customer practices represent an opportunity lost for the State to reform banking

business as the entities refocus on the UK banking market. Quasi-nationalisation

stemmed the solvency crisis of the banks, but stronger State involvement is

required to effect substantial cultural change. The context to the UK banking

crisis is considered in more detail next.

RESEARCH CONTEXT

The financial crisis in 2008 led the UK Government to invest over £65bn to

prevent the collapse of two major UK banks: RBS and LBG (National Audit

Office, 2010). As a result, the UK Government had an economic stake in RBS

of over 84% (RBS, 2009b)1and in LBG of 43% (National Audit Office, 2010).

Government ownership was intended to be temporary (Darling, 2008). Both

banks retained London Stock Exchange Listings. The banks were to maintain

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