Media coverage over the last few days has been dominated by London riots and the various economic woes embracing the western world, ranging from Standard and Poor’s downgrading of the US’ sovereign debt to the ongoing crisis within Euroland. Fortunately, the UK is one step removed from the latter crisis, although future growth projections are being reined back as the Euro fights for its existence. 

However, the plunging stock markets of the last few days have given the Treasury a real headache, particularly in respect of the Government’s 84% stake in Royal Bank of Scotland (RBS) and its 41% holding in Lloyds. Shares in both banks have dived, with few predicting any short-term recovery. The likelihood, too, that Santander UK’s Initial Public Offer - of c20% of its stock – will be pushed back into 2012 does not inspire confidence either. Indeed, some experts are talking of almost a decade before the Government can divest itself completely of its banks’ stakes.

Earlier this year, based on share prices then prevailing, the ASI document Privatisation Re-visited placed a combined c£57 billion value on these two stakes, after deducting a 10% discount. The comparable figure currently is c£30 billion, thereby indicating a decline of over 45% within just a few months. Hence, the Government is sitting on a monumental notional loss – RBS’s current share price is c25p compared with the Government’s entry price of 50p: the Lloyds figures are 32p and 74p respectively.

To a certain extent, a weak share price may help both banks, as well as Barclays, to fight off efforts to compel separation between retail and ‘casino’ banking: HSBC is in a different financial league so can take a laid back view of the Banking Commission’s recommendations next month. 

Very testing times for the banks. It will be immensely challenging both to boost the value of the Government’s stakes - and to create a competitive banking market.