OUTLOOK: Failed HBOS merger is a cautionary tale for Lloyds privatisation

I have it on good authority that Alistair Darling experienced last minute doubts about blessing the merger of HBOS and Lloyds during the height of the financial crisis in the autumn of 2008.

“Should we be doing this?” asked the former Chancellor. “Probably not” came the reply from one senior adviser. ”But it’s too late to go back now”.

And thus the disastrous marriage went ahead, propelled by political expediency and official pusillanimity. We’re all still living with the consequences of that approach to Britain’s banking sector, as demonstrated by today’s announcement by Lloyds of another £1.8bn provision for Payment Protection Insurance mis-selling.

The bank has now set aside an astonishing £9.8 billion to compensate customers. But the salient lesson is that Lloyds is still springing nasty surprises, five years after the merger. A union that was meant to be a tidy private-sector solution to the implosion of HBOS has been a catastrophe for Lloyds shareholders, taxpayers and the wider economy.

What this bad news won’t do, however, is upset the Coalition’s privatisation plans. Ministers have made it clear they are going to plough ahead with selling off the state’s remaining £19bn equity stake. There is talk of another big offering in the next two months, following last year’s £3bn sale. The bank itself says it should be able to start paying out dividends again later this year.

But perhaps we should stop and ask whether this drive to privatisation is in the broad public interest? A privatised Lloyds will be an excessively dominant player in the current account and small business lending market.

Labour wants the competition authorities to look into the high street banks, with a view to splitting them up and creating more competition. But wouldn’t it be easier to divide Lloyds while the Government still holds a third of the equity?

Of course, the Treasury will say that it’s far too late for that kind of radical restructuring now: whatever the theoretical merits of more banking competition, the privatisation wheels are in motion. The same argument applies to the Royal Bank of Scotland, which is set to announce an £8bn full-year loss for 2013-14, as the skeletons of past misdeeds continue to tumble out of the closet.

Ministers have set a course, informed the markets, and now they simply have to stick to the plan because, well, we are where we are. But where have we heard that kind of expedient logic before? And where, pray, did it get us last time?