http://www.bloomberg.com/apps/news?pid=20601039&sid=amqH8lCSKz7E Banks Should Be Handed Over to Peopleâs Ownership: Matthew Lynn Share Business ExchangeTwitterFacebook| Email | Print | A A A Commentary by Matthew Lynn Nov. 3 (Bloomberg) -- The U.K. government needs to start thinking about what it will do with all the banks it now owns. The answer is simple: Hand them to the people. In the 1980s, Britain led the world with a radical economic experiment. Telecommunications systems, electricity generators, airlines, and other state assets were sold. Privatization was such a huge success that much of the world copied the policy over the next decade. In the next 10 years, the U.K. could try something similar. Instead of selling the stakes it acquired in the financial system to other banks, or listing the shares on the stock market, it could create mutually owned societies. Royal Bank of Scotland Group Plc could be a peopleâs bank, owned by everyone. That would ensure more diversity, competition and stability, all goals just as worthy as getting back the money Prime Minister Gordon Brownâs government spent on bank rescues. As a result of the catastrophic collapse of confidence last year, the U.K. government has ended up as a big player in the financial-services industry. It owns the failed lender Northern Rock Plc outright. It has a 70 percent shareholding in RBS, and a 43 percent stake in Lloyds Banking Group Plc. The standard view is that the government should gradually sell those assets to the highest bidder once they are in good enough shape. Bidders are already lining up for Northern Rock now that it has permission from the European Union to split the good bank from the bad. And the government has said it plans to create three new banks out of the assets it already controls. Best Price But hold on. What is the government really trying to achieve here? Sure, it wants to recoup as much of the money it pumped into the finance industry as possible. Taxpayers spent a fortune bailing out these businesses, and the U.K.âs own finances are in terrible shape. If the shares are worth money, the government should work as hard as it can to get the best price for them. And yet, the government should have other objectives as well. It should be trying to create a more stable banking system that doesnât inflate into a bubble, and then burst afterwards. It should promote more competition, so customers get a better deal. And it must change how the financial system operates. If Brown wants to achieve those ends, he should be looking at reviving mutual ownership. Or some kind of trust, in which the bank is owned by the citizens. âMutually Ownedâ Take Northern Rock. It used to be a âmutually ownedâ building society, meaning it was owned by its depositors and mortgage customers, rather than shareholders. There used to be lots of those institutions, until most listed themselves on the stock market and became conventional banks. Why not convert back to mutual status? The customers could take ownership -- with the proviso that all the money received from the government be paid back before the mutual society could hand out cash to its new owners. More radically, why not do something similar with RBS? The government would have to buy out the remaining private shareholders, which at current prices would cost about 7 billion pounds ($11.5 billion). Then it could place the whole thing in a trust, with every U.K. citizen receiving one share. Even better, give the shares to everyone younger than 10; since the British are racking up massive debts for their children, it might be nice to give them something back. The result? A genuine peopleâs bank. Three Benefits There would be three advantages over simply selling the banks to the highest bidder. First, it would create more diversity. Before the credit crunch, there were lots of banks trying to do the same thing. They ended up taking more risks to stay ahead of the game. Different types of institution could follow a greater variety of strategies. Some would prosper, others fail -- but they wouldnât all fail at once. If biodiversity is vital for ecosystems, the same idea can apply to financial systems, too. Second, there would be more competition. Selling stakes to competitors will create a narrower, more concentrated banking market, since the buyers would probably be the existing lenders. But we hardly need bigger institutions dominating the market. And the consumer surely deserves more competition, not less. That is achieved by creating new types of ownership, and keeping the state-owned banks alive. Third, it would help to engineer a change of culture. An RBS owned in trust by all the citizens, or just the children, would surely feel less compelled to follow the bonus-driven strategies of other banks. It would adopt a more sober, socially responsive, longer-term approach. That would be a refreshing change for the industry, and one that many people would find attractive. Everyone complains about how the banks have gone back to their old risk-taking ways. Yet since we havenât changed the structure of the industry, itâs no wonder. New forms of mutual ownership would be a genuinely radical alternative. And if it worked, it might provide a template for the rest of the world -- just as privatization did in the 1980s.