Bank takeover must be reassessed now

THE government has shown it can act decisively and boldly when it comes to saving the UK's banking system. This newspaper supports the actions of Gordon Brown and his Chancellor in recapitalising the major banks, guaranteeing inter-bank lending and providing substantial fresh liquidity for the money markets. They deserve praise. But there is one area where we ask the government to reconsider – the prospective takeover of HBOS by Lloyds TSB.

The original rationale for it was sound: HBOS shares were collapsing in value, a clear sign the market considered the bank would find extreme difficulty in meeting its liabilities in the wholesale money markets – those liabilities are rumoured to run to £100 billion.

The takeover seemed to provide a way out, as the new, enlarged institution would have the capital and borrowing power to meet those HBOS liabilities. In the longer term, the commercial "fit" of the two operations favoured business synergy and cost savings, which offered an early return to growth in the share price. The government gave its seal of approval by waiving normal competition rules – vital, as the combined bank would have a dominant share of the UK retail and mortgage markets, and a significant share of the corporate lending sector.

However, subsequent events have shattered this rosy outlook and raise grave questions regarding the efficacy of the move – questions that must be answered now if the shareholders and customers of both banks, as well as taxpayers, are to be reassured. We ask that the process is halted until these clarifications are made.

Question 1: Does the rationale for the move still hold?

The total seizure of global inter-bank lending (following the collapse of Lehman Brothers in September) brought the entire British banking system, not just HBOS, to the brink of insolvency. As a result, on Monday, the Treasury moved to inject public money directly into the main banks, effectively securing a degree of state ownership in Lloyds TSB and HBOS, as well as RBS.

In this more complicated situation, is the merger of Lloyds TSB and HBOS – which was an emergency transaction – still the best solution for both institutions and for a restructured financial system?

The potential downsides of the takeover were put aside during the initial crisis that led to the banks coming together. In normal circumstances, neither the government nor the regulatory authorities would have countenanced such a move, as it would have diminished competition. Surely, with the government moving to recapitalise all the main banks, it would be sensible to revisit the implications, for competition policy, of any Lloyds TSB- HBOS combination. If the government can act overnight to semi-nationalise the banking system, it can certainly review the monopoly implications of the takeover in rapid fashion.

Question 2: Might both banks now be better off if they remained independent in the new circumstances?

Any rushed, shotgun marriage of Lloyds TSB and HBOS implies big job losses just when the economy is going into recession. And given the strong regional associations of Bank of Scotland and Halifax with their places of origin, there is the strong possibility that many customers – especially Scottish corporate borrowers – may feel alienated and switch to rival banks. This raises the obvious point that – with the Treasury now underwriting both banks – it might be a better commercial option to let each institution trade its way out of difficulty. That would preserve customer loyalty and local management expertise, without the (possibly unnecessary) addition of a massive restructuring of both banks simply to integrate them into one organisation.

For Scotland and Edinburgh, which now faces the downsizing of its entire financial sector, with massive implications for jobs and investment, this is an especially acute issue. Surely it is worth the government giving some public thought to this argument.

Question 3: Why is the government in such a rush to promote the takeover?

When the deal was first announced, there were obvious reasons for the government to move instantly to offer public support, otherwise HBOS shares would have gone into freefall and its access to funds walled off. But the government has continued to promote the merger in ways that are less justified. For instance, the Treasury's offer to recapitalise both banks seems to have treated them as (already) a single entity.

Why? It may be that the takeover still goes ahead in the new circumstances, but shareholders need to know the details of the alternative scenario in which the Treasury recapitalises both banks separately. Surely that is only fair.

It can be argued that any rethink or delay on the takeover will only cause confusion in the markets during a period of fragile confidence, adding to overall instability in the financial sector. On the contrary, the markets are already confused by the long drawn-out process – it still requires shareholder approval. As a result, the HBOS share price has moved violently. Lloyds TSB has changed the terms of the deal once, and the markets may force it to do so again.

This is hardly the best atmosphere in which to create a new, combined company. Besides, when HBOS shareholders do come to vote on it, they are likely to ask the very same questions The Scotsman is now posing. Which is why they should be answered instantly by the Treasury, the regulatory authorities and the senior executives of both banks.

It may be that, given the answers to these questions, the takeover still goes ahead. Our preference, whatever occurs, is for the Bank of Scotland name to remain in being, with a headquarters in Edinburgh. The cause of the present financial crisis is rooted in the loss of a traditional banking culture as represented by Bank of Scotland in its prime: prudence, service and a commitment to the community.

Nobody has the ideal solution regarding the future of HBOS and Lloyds TSB, but one thing is certain: we should not sleepwalk into this takeover without a better understanding of its implications.