Friday, 18 September 2009

Agency problems at Lloyds

Is Lloyds, as Robert Peston suggests, really acting on the instructions of its shareholders in trying to withdraw from GAPS (the Government Asset Protection Scheme)?

Or is it, as seems more likely, trying to give its management more power?

The EU and Treasury intervention that he refers to will restrict the freedom of Lloyds executives to hang onto the empire they've built; and incidentally, to set their own pay and credit policies.

Selling off the Halifax branches might well be in the interest of Lloyds shareholders if not in the interests of the board.

What's more: if the government does wish to make more credit available to UK businesses and consumers, one way to do it is to make sure banks have lots of capital available to support lending. If Lloyds really can raise £20 billion of new capital, wouldn't it be better if that can support £100 billion of new lending, rather than just replacing the GAPS scheme without increasing loan capacity at all?

With the economy in the fragile state it's in, this cannot be a good move for the state and probably not for Lloyds shareholders either.

This sort of power structure and incentive, much more than the details of pay and bonuses, is the real problem with the governance of banks in the UK.

2 comments:

Deborah Hyde said...

A leading shareholder told us here at Citywire they have not been contacted by the company to ask which option they would prefer.
http://bit.ly/2zKLAR

And remember Lloyds management admitted they didn't contact shareholders before they inked the HBs deal. http://bit.ly/4bRTzg

Don said...

You might have missed the news that this is a Financial Innovation: Banks will now raise capital and sit on it. The bankers will be paid enormous sums for their steadfast ability to make no effort to use the money that they control for anything except paying themselves.

Don the libertarian Democrat