Shortly after my book on the collapse of HBOS came out I was speaking to a meeting of savings and post bank executives from Europe and further afield. These are institutions which have largely disappeared from the UK (the Airdrie Savings Bank being a rare surviving example), but abroad they thrive, servicing local businesses and individuals and providing safe places to deposit your money.
The chairman of the Belgian Post Bank asked me whether HBOS had lost money on US sub-prime mortgages. I answered that the worst collapse in modern British banking history wasn’t caused by the sort of racy investment trading which had brought down Lehman Brothers and RBS, but old-fashioned bad lending. Then I said something really silly: ‘They did lose £7.2 billion on US mortgage-backed securities, but it was a small sum and you could forgive them for it because they bought them as a defensive measure, believing them to be safe.’
My questioner was not impressed: £7 billion may have been small change on the enormous HBOS balance sheet (and it was dwarfed by the eventual £54 billion losses of the bank), but in his world it was a gigantic sum. ‘Didn’t anybody get on a plane and go to America to see what they were buying?’ he asked. The answer was, of course, no. HBOS bought them sight unseen because they were triple A rated by all the international ratings agencies.
The exchange brought home to me what we have lost in British banking during my adult lifetime. When I first came to Scotland to work in the 1970s Bank of Scotland (which later morphed into HBOS) and Royal Bank of Scotland may have been bigger than the average European savings bank, but they shared many of the same attitudes to lending. If they couldn’t see or understand where their depositors’ money was going, they would not do the deal. The thought that they would lend huge sums on someone else’s say-so would have been horrifying to them.
Yet by 2008 both banks had become not only too big to fail, but too big to manage. Their boards had no idea what was going on in their institutions and if they had known they probably would not have understood it. Highly paid executives, usually with little experience and no qualification in banking, had lost sight of the basic principles which were axiomatic to the bankers I first met 40 years ago – never run out of cash and don’t lend to people who can’t repay.
Banking for humans
Can we ever get back to that situation where banking is on a human scale, where bankers (experienced and trained in their craft) believe that ‘know your customer’ means look him or her in the eye, rather than staring at a computer score? Where, if banks do go bust, they are small enough to be contained and don’t plunge the country into deep recession.
The answer is yes. We could break up the big banks to form a network of smaller regional institutions – starting with RBS. All that stops us doing it is the political courage.
Unlike Lloyds, where the Government has been steadily selling shares it acquired when the bank had to be rescued in 2008 and sold a further £500m in early March, RBS remains 80% owned by the public. Despite a drastic pruning of its balance sheet and the sale of non-core businesses, its stock price is still substantially below the level at which taxpayers, who funded the £45 billion recapitalisation of the bank, would get their money back.
Chancellor George Osborne can only dream of returning the bank (“get rid of” in his own words) to the private sector and using the proceeds to pay down the national debt. So what should be done with it?
An alternative has been proposed by the New Economics Foundation (PDF). This suggests that, rather than reprivatising RBS, the Government should create a network of regional banks. ‘We have a unique opportunity to rebuild public trust in the UK banking sector’, it says. ‘Restructuring RBS into a network of local banks with a public service mandate and supervised by citizen stakeholders would transform the face of UK domestic retail banking and bring significant economic benefits.’
The idea is not new (I proposed it myself in my report Smaller Greener Banking (PDF) for Friends of the Earth Scotland last year), but what is novel is the level of evidence and analysis marshalled by NEF to support their case. The report argues that there are considerable uncertainties about the amount of money that could be raised by the government through a sell-off, how soon it could be raised, and whether it would be possible to avoid making a loss on the sale. Turning RBS into a local stakeholder-backed banking network would deliver significant economic and social benefits much quicker.
Through comparisons with public savings banks in Germany and Switzerland, NEF estimates that UK GDP would already have benefited from an immediate boost of £7.1 billion, and an additional £30.5 billion over three years had localisation taken place in 2008 – exceeding the £700m annual savings in government interest payments that would result from using the estimated £40 billion proceeds from privatisation to repay the national debt.
The key benefits of restructuring RBS into a network of local stakeholder banks would be:
- increasing credit for the ‘real economy,’ rather than financial and property lending still favoured by big banks;
- protecting jobs and growing their number and quality;
- improving the diversity and resilience of the UK banking system;
- promoting financial inclusion and rebalancing the economy.
It would also help to increase investment and economic development in regions outside London, as well as bringing greater financial support for local social, cultural, and sporting activities.
The report gives two regional examples for England (a ‘Royal Bank of Bradford’ and one for Cornwall), but says that Scotland, Wales and Northern Ireland should be addressed by the devolved administrations.
Should the general election in May result in a Conservative Government it is likely that RBS will remain in public ownership until it can be privatised in one lump. With scandals emerging regularly, that day may be many years off. Coutts, RBS’s private bank for the mega-rich, is being investigated for tax evasion in the latest of a line of disasters to hit the institution. The Labour and Liberal Democrat parties are likely to be more receptive to the NEF argument, although Labour’s recent very weak banking reform paper (PDF) stopped short of advocating the break-up of the large banks.
It is an issue the Scottish Government should consider seriously because there is both a need and an opportunity to press for the break-up of RBS in Scotland. The Competition and Markets Authority is investigating UK personal and small and medium business banking, where five banks hold more than 70% of the market between them. In Scotland the situation is much worse. Analysis by the Scottish Government shows that just two banks – RBS and Bank of Scotland (now owned by Lloyds) – share 70% of those markets.
Forcing the creation of smaller, regional banks would be a way of introducing genuine competition into the Scottish banking market, to the benefit of the economy and consumers alike.