Should we all get a piece of RBS and Lloyds?

BBC business editor Robert Peston on a shares-for-all proposal

If you were running Royal Bank of Scotland or Lloyds, would you welcome or hate the idea of every one of the 45m adults on the UK's electoral register having a direct shareholding in your bank?

The management of those banks might see this radical form of popular capitalism as a way of bridging the yawning gulf between banks and people, which has so poisoned banks' attempts to rebuild their reputations - along with their financial strength - since the great crash of 2008 (see Mervyn King's choice words about the banks this weekend, as just one manifestation of the rift).

If everyone could profit in a tangible, personal sense from the recovery of the banks, perhaps there would be less of a general feeling around the place that banks and bankers are only in it for themselves, and never mind the rest of us.

That, at least, would be the positive opportunity for bankers that could arise from the proposal by a Lib Dem MP Stephen Williams - which has been developed by the financial adviser, Portman Capital - to distribute to all of us as individuals (or at least those of us on the electoral register) most of the nationalised shares in Royal Bank of Scotland and Lloyds.

This distribution to almost everyone of 79% of the 83% of taxpayers' stake in RBS and 41% of the holding in Lloyds would be subject to a clawback mechanism which ensured that the £66bn injected by the state into these two banks would be repaid.

Once we had the shares, the shares could not be sold by any of us unless and until the price was above the price paid for them by the Treasury in the great rescue of 2008. And as and when we sold them, the new private shareholders would only pocket the increment above that rescue price: the rest of the dosh would revert to the Treasury, to pay back that £66bn.

It looks like a neat scheme, and has been described by the Treasury as an "interesting contribution to the debate" (so perhaps damning with faint phrase, but not at least a "stupid boy, Pike" rejoinder).

There is no doubt that it would be ferociously complicated to organise. And ministers and officials would be acutely aware of the great opportunity here to spend a fortune on online distribution mechanisms which ended up depriving millions of their entitlement.

That said, HMRC's online interface with taxpayers seems to have worked ok. And if Facebook was able to acquire more than 500m active users from an initial outlay of £25m, it's surely not as expensive and complicated as it once was to electronically distribute shares to the UK adult population and then monitor the relationship between shareholders and banks.

For Portman, however, the biggest advantage of the scheme isn't that it would at a stroke turn the UK into a shareholding democracy or would give something back to all of us for the economic pain we've suffered in the past few years as a result of the reckless lending and investing of the banks.

Portman believes that distributing the shares in that way would improve the prospects of the state being repaid its £66bn: UK Financial Investments (UKFI) on behalf of the Treasury would not have to suffer an "overhang" discount each time it sold a tranche of shares, a painful discount necessitated by the market's knowledge that the state isn't a long term holder of the stock, and that the initial sale tranches would only be the first of many.

There may indeed be that advantage. On the other hand, it is also possible that the Lloyds and RBS stock prices would be depressed below the rescue price for years by the knowledge that there would be a flood of popular sales of the stock, each time the price approached a level that generated a return for the state and for the individual.

As for the attitude of the boards of RBS and Lloyds, they will wonder two things.

First, would the distribution of shares to millions and millions of people let them off the leash, give them free rein to do more or less what they like - because if the shares became so widely held in such small quantities, it would be immensely difficult to put together any kind of alliance of investors to pressurise the directors to behave in a particular way?

Extreme popular capitalism could release bank directors from being answerable either to the irksome government (as owner) or to governance-obsessed investment institutions.

But maybe there would be precisely the opposite effect of handing shares to every voter. If we all had the opportunity to make a few bob from the performance of RBS and Lloyds, perhaps we would all become obsessed with how the banks' directors manage things.

Perhaps we would express our views, via social networks and in opinion polls, in ways that made it very difficult for the boards of banks to ignore.

My guess is that the City establishment will view Mr Williams' proposal to democratise the banks as naive and impractical. Which, given the recent track record of that establishment, some would say is one very good reason why the government should not summarily dismiss the idea of bank shares for all.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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