Why the Lib Dems need to block the RBS sell-off

I don’t feel that sorry for outgoing RBS boss Stephen Hester. Nobody with a licence to extract money from the economy – in this case for severance package worth £5.8m – really deserves much sympathy.

But he has had an impossible job. Does he follow the regulators' demands (reserves) or the Treasury’s demands (profits leading to early privatisation)? Or does he follow the political imperative (lending to small business)?

In fact, of course, the infrastructure making small business lending possible has been dismantled long ago, so that is impossible, but he can’t admit that in public – any more than his fellow bank CEOs, all with their own licences to extract money from the economy.

In practice, Hester has tried to do all three and so has displeased his masters at the Treasury. But what is really unacceptable is that the Treasury’s instructions have not been about facilitating recovery at all – how otherwise can we explain that small business lending has been lower for the banks in public ownership than the rest? It has been about early privatisation.

Nobody would have welcomed the 2008 banking collapse. But given that we ended up taking RBS into public ownership, it would be a tragedy if it was returned to the market in the same dysfunctional structure that it was in before.

Britain is crying out for a small banking infrastructure like our competitors. The unbalanced state of the economy demands it.  The coalition agreement promises to "foster diversity, promote mutuals and create a more competitive banking industry". How can the coalition justify returning the RBS monolith to the market without making it a useful and effective supporter of business recovery again?

The Commission for Banking Standards report is published today and will recommend breaking it up - though it isn't clear as I write what this means, and how far the report leans towards the Archbishop of Canterbury's view that the break-up must be into more useful regional banks.

The Treasury can go ahead with a sell-off and ignore the Commission if it wants to, but it can't ignore the Lib Dem half of the coalition.  It seems to me a clear cut case for the Lib Dems here: vetoing early privatisation until RBS can be returned to the market as a useful and effective lending infrastructure, which it manifestly isn't at the moment.

That alone would justify the party's involvement in the coalition.  The prize could not be more important: providing the UK with an effective lender to expanding business which is so urgently needs.