The chancellor and Treasury owe the British public more than a return to the same defective banking system we had before the 2008 crisis
Executives at Royal Bank of Scotland can’t catch a break. Despite posting its first profit for a decade in its 2017 annual report last week, the bad press keeps coming for the bank, which has been under majority public ownership since 2008. A major fine by the US Department of Justice for mortgage mis-selling is expected this year.
Separately, RBS executives are currently embroiled in a Treasury Select Committee inquiry into mistreatment of small and medium-sized enterprises (SMEs) by the bank’s Global Restructuring Group (GRG) between 2008 and 2014.
This week, the inquiry revealed that three-quarters of the staff at a new restructuring department were formerly employed at GRG. Chairman Howard Davies delicately calls these enduring problems ‘legacy issues’.
So one might forgive a dash of blue sky thinking and a fixation on distant goals. In a cautiously optimistic foreword to the annual report, reflecting on a share price that climbed 20 per cent over the year, Davies welcomed government plans to relaunch the privatisation process in March 2019.
But privatisation would be no triumph. Instead, selling the public stake in RBS would be a wasted opportunity for meaningful change.
Full-scale privatisation is the stated endgame of a process of reform first announced, by the then chancellor George Osborne, in 2013. It is implausible that a hasty return to private shareholders’ hands will align with Osborne’s other two stated objectives: to support the British economy and secure the maximum value for money for the public.
When the March 2019 plans were announced in Philip Hammond’s Autumn Budget, they looked set to land taxpayers with a £26 billion loss.
And the current chancellor and Treasury owe the British public more than a return to the same defective banking system we had before the 2008 crisis.
When the financial tidal wave hit London in 2008 following the Lehman Brothers collapse, RBS was in hot water. Its chief executive at the time, Fred Goodwin, repeatedly denied that the bank was insolvent. His deception came unstuck. RBS received a bailout from the Treasury to the tune of more than £45 billion and the government wound up with an 81 per cent stake in the bank.
Some might have expected the bailout to call time on years of recklessness. In 2011 the Financial Conduct Authority published a report examining the reasons for the failure. Among them were ‘concerns and uncertainties over RBS’ underlying asset quality’, a botched takeover of ABN Amro; overly risky short-term funding and credit trading; and ‘an inadequate global regulatory capital framework’.
To cap things off, and in an attempt to explain so many counts of imprudence, the report also probed ‘underlying deficiencies in RBS management, governance and culture.’
Yet these concerns skate over the basic defect inherent in the banking sector. Commercial banks, for which profit is the raison d’être, lend primarily to unproductive activities like mortgages on existing homes and speculation on financial derivatives, on which they can generate the highest return.
Much less goes to the real economy, and in particular to SMEs. This incentive problem distorts the economy, produces financial instability, and perpetuates inequality.
The real economy is not the only casualty. Our present banking system is endemically destructive for the environment.
Bank lending is also influential in shifting funds towards fossil fuel and energy-intensive industries. Admittedly, RBS is less culpable here than other UK banks, especially Barclays and HSBC.
The 2017 Fossil Fuel Finance Report Card, published by a coalition including Banktrack and Rainforest Action Network, found a dramatic fall in its lending to ‘extreme fossil fuel’ activities since 2014.
But on climate more broadly, RBS is a laggard. A 2016 report by Christian Aid found that RBS, like all other major banks in the UK, had no timeline for a transition to a low-carbon economy.
Neither did it engage with client firms on their own transition strategies. More recently, a survey of 15 European banks conducted by ShareAction placed RBS only 11th in the list. Lloyds, the other UK bank to come partly under public ownership in 2008, before being privatised early last year, is ranked last.
Instead of bringing needed change to a sclerotic banking sector, the bailout process has simply reset a broken model.
There are alternatives. Britain has an unusually high proportion of its banking services provided by a very small number of privately owned organisations, as opposed to public savings or co-operative models.
Moreover, these giant firms operate at the national level, while other countries have far more regional or local banks.
The New Economics Foundation used international data to show that banks organised on a ‘stakeholder’ model, rather than seeking to maximise shareholder value as commercial banks do, contribute more to financial stability and local prosperity. They also lend more to businesses and promote financial inclusion.
Public ownership of RBS is an opportunity for major, structural reform. Its assets still represent a significant chunk of the UK total.
The rewards of introducing diversity into the banking ecosystem, by dissolving RBS into a series of public, regional banks, would be substantial. The costs of returning to the old model are potentially greater still.
Rob Macquarie is an economist for Positive Money.