Treasury's dilemma over RBS break-up

A woman walks past an RBS branch RBS chief executive Stephen Hester said the collapse was "disappointing"

In a way the mystery is why it has taken so long for RBS's sale of 316 branches to Santander to collapse.

It has been clear almost from the start in 2009, when the European Commission obliged RBS to dispose of these branches as a way of injecting greater competition into the small-business banking market, that it would be a nightmarishly difficult deal to execute.

The banking industry was in crisis and most banks were trying to retrench rather than expand, so there were never going to be many buyers.

In the end, there was only one, Santander.

But that was only the start of the challenge for RBS.

Persuading more than two million customers to move to a new bank was always going to be hard.

And seamlessly transferring the computerised accounts from RBS's patched-up old systems to Santander's was a mammoth and complex task.

Inevitably the process has been hit by repeated delays.

A deal that originally supposed to have been completed at the end of 2011 was - according to my sources at Santander - looking as though it would not finally happen until 2015.

So late on Thursday RBS was told by Santander that all bets were off.

Who is to blame for the debacle?

Well the official approach being taken by both sides is that the termination is just one of those things. The two banks' press releases are studies in polite obfuscation about what went wrong.

Privately they are not quite so politically correct.

'Tired of waiting'

Broadly, Santander says it was tired of waiting for the new customers to arrive - and says RBS's inefficiency and complex computer systems was the cause of the seemingly interminable delays.

As for RBS, it says that Santander's own IT team was intimately involved in the process of hiving off the business, and had been dragging its feet for months.

Is anyone bitter? You bet.

What of course everyone is at pains to say is that no one should read into this that Santander got cold feet because in any way its UK business has been damaged and weakened by the financial and economic mess in its home Spanish market.

As I have mentioned many times, Santander in the UK is a ring-fenced subsidiary, with its own discrete capital resources. It is in robust financial health (or as robust as is possible for any British bank at a time of economic stagnation).

But it is quite consistent with Santander in Britain being in rude health for it also to be little short of barking mad for Santander as group to be acquiring yet more assets and liabilities anywhere - including the UK - at a moment when Spain as an economy is an evolving and dangerous crisis.

So RBS's view, for what it is worth, is that Santander has for some considerable time been looking for a reason to escape from this big commitment to expand.

Of course Santander denies this.

What now?

Where does it leave the banks?

Well Santander is the same as it ever was: an effective challenger in the retail market, but with too few small-business customers to count as much of a player in that economically important end of the market.

As for RBS, it never wanted to sell the branches. Being mandated to do so by the European Commission significantly depleted its ability to create incremental income for its shareholders. And the costs of carving out the branches for sale has so far cost it many hundreds of million pounds.

Will RBS be fined by the Commission for failing to sell the branches by the target date - which now looks inevitable, given that there is no obvious buyer to replace Santander and what's on offer may be too small to be floated off as a viable independent standalone bank?

RBS and the Treasury - which will negotiate with Commission on RBS's behalf - both think that punishing RBS would be unfair and unlikely.

They make three points:

  • That RBS's execution of the sale has been monitored to demonstrate that it was worked assiduously (if unsuccessfully) to complete the deal.
  • That RBS has sold or almost sold a whole bunch of other very valuable assets that the Commission ordered to be hived off (including the insurer Direct Line, a global payments business and a big commodities trader).
  • That all eurozone banks are now in receipt of enormous subsidies in the form of huge cheap three-year loans from the European Central Bank, so it no longer looks quite so fair to muller RBS for being bailed out by British taxpayers in 2009.

The collapse of the disposal does however put the government in a difficult position.

On the one hand, as the biggest shareholder in RBS by far, with more than 80% of the shares, HM Treasury would reap a financial reward if the Commission agreed to cancel a forced sale which is highly damaging to the wealth of RBS's owners.

Against that, it is important government policy to increase competition in a banking industry widely perceived to be lacking in sufficient competitive tension. The transfer to Santander of all those branches and customers was intended to give the big banks a serious run for their money in the provision of credit to smaller companies - a service perceived to be vital to rehabilitating the British economy.

So what is the chancellor's priority - structural reform of the banking industry to increase choice or minimising the risk that taxpayers will incur huge losses on the 2008 rescue of RBS?

UPDATE 14:53

Two other fairly important things to mention:

First, we will know in the coming week whether RBS will be allowed by the Financial Services Authority and the Treasury to withdraw from the Asset Protection Scheme.

This is the insurance policy against losses on a few hundred billion pounds of dodgy loans and assets provided to RBS by the government in 2009.

At the time, it was seen as a useful alternative to RBS raising even more expensive capital from taxpayers.

Today, from RBS's point of view, the APS has become a very expensive insurance policy: RBS no longer owns most of the insured assets, so is paying £500m a year to taxpayers for a service it no longer needs.

RBS would love to have that £500m of income back.

Second, RBS seems to be surprisingly happy that the sale of the branches to Santander has collapsed.

Apparently, these branches and associated assets generate £300m a year - net income RBS is delighted to retain for as long as possible.

That said, getting rid of them may be easier than I thought.

RBS has already received approaches from two institutions interested in picking up where Santander left off.

And if those potential bidders evaporate, RBS thinks it may be able to rebrand the branches as Williams & Glyn's (a bank it once owned) with a view to floating them on the stock market.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 241.

    208. powermeerkat Katyn Massacre

    There are people on here who think Britain won the second world war, and the EU maintained peace for 60 years. I'm not that old, just love history, it teaches you far more. Don't forget the UK & US were holocaust deniers during the 40's. I'm not Jewish trying to make a point by the way.

  • rate this

    Comment number 240.

    Yet another side show as the REAL NEWS is what the banks in the US will buy with the new bail out money (announced 13th of sept)

    THAT BEING; "T bills"! So no real help with the economy there then

    MEANWHILE; The FED is just going to buy DERIVATIVE after DERIVATIVE. junk paper.

    WHAT does this men; We are seeing the death of the $

    & the BRICKS know it & so does RUSSIA


  • rate this

    Comment number 239.

    Hands up if the banking system works for you.

  • rate this

    Comment number 238.

    @228. George you are talking rubbish. That was the single largest integration that worked. People like Peston who know nothing of banking IT should not make comments that they cannot hold up in court!

  • rate this

    Comment number 237.

    Anyone tried to start a bank recently? Nah,you'll need a small fortune in real money (deposits) which is exactly what our banks DON'T have.

    Watch Bank of Dave to see how ludicrous this is:

    A license to print money, bet on a one eyed three legged nag at the derby, get paid a whole load of money and when it all crumbles ask the tax payer to sub you

  • rate this

    Comment number 236.

    Why can't RBS be split into it's previous incarnations as NatWest and RBS and then floated at the appropriate time? It would create more competition and perhaps be easier logistically then hiving off 300 branches and selling them off.

  • rate this

    Comment number 235.

    I am delighted that my account has not been sold to a Spanish Bank without my permission just because some EU Eurocrat said it should be so. When all the other Banks in the EU have had help from their Governments or the EU stability Fund it was always ridiculous that RBS and Lloyds were being told what to do. We want out of this undemocratic nonsense!

  • rate this

    Comment number 234.

    @221 Agree with you. The media love hit when they actually know nothing!

  • rate this

    Comment number 233.

    All the talk of lending to small businesses, large businesses even private individuals....has nobody realsied that people are trying to get free of debt not take on more.

    Remember is was said that it was people borrowing too much that got us to this point

  • rate this

    Comment number 232.

    We MUST forcible and quickly break up the banks into bits that can fail. Say into 10 parts for each of the big 4. Then let the bust bits go bust as provided for in Bankruptcy Law - with their assets sold off for what ever they will fetch and their debts called in.

    THERE IS NO OTHER WAY to restart capitalism.

    Ignoring the problem (the current 'answer') will just make matters far far worse.

  • rate this

    Comment number 231.

    Santander did everything they could to cynically block and delay progress and in the meantime picked up as much corporate banking knowledge as they could.

  • rate this

    Comment number 230.

    Investors believe they deserve double-digit returns each and every year, and if stocks don't do the job, other investment vehicles will. There is a disconnect between the real world of goods and services and the speculative world of financial assets. Jamie Roberson -

    There is a true disconnect between reality and monetary fantasy and its regulation.

  • rate this

    Comment number 229.

    #217. shaunie_r

    Crosse & Blackwell sell the pickle you mention.
    But all is not as it seems.
    The J.M. Smucker Company actually own C&B.

    Verging on the ridiculous.

    And Branston wants the taxpayers of the U.K. to subsidise him and thank him too.

  • rate this

    Comment number 228.

    " from RBS's patched-up old systems to Santander's " - when I worked for Coutts IT when NatWest was taken over by RBS, it was hailed as the largest most complex and successful IT integration ever when finished. I see the truth is now comming out now LOL.

  • rate this

    Comment number 227.

    Could it be our Banking and Finance Gurus have got the message..
    Almost impossible to make money from people with very little money.
    Concentrate your efforts on people who do have money.
    God help the people that cannot compete.

  • rate this

    Comment number 226.

    Eventually someone will explain just how incompetent the City were before the algorithms sent them mad...

    Too Bust To Save

    The Too Big To Fail lie is like the rest of their Wizards of Oz economics

    Either accept they're totally bust & deal with their tax avoiding offshore mess for the benefit of the 99%, or take the 99% back to a micro chipped version of Downton...

    Never Getting It Back indeed

  • rate this

    Comment number 225.

    Interesting read -

    Equally interesting debating of tax -

    It is crazy to be amassing profits which do not return to the real world, but instead, finamce government debt with money that government should have collected in taxes.

    According to Meache the sums wipe ou deficit

  • rate this

    Comment number 224.

    The entire process of what takes place is quite brilliantly insane. It is crazy, squirrels for the nuts and the only answer is significantly increased taxation upon consumption, finance and profits. There is no other option than wait for disaster to strike as it has Ireland, Portugal, Greece, Spain, Italy. There is no growth taking place other than with paper profit & deficit. Tax and spend - now.

  • rate this

    Comment number 223.

    RBS - can they do nothing right?

  • rate this

    Comment number 222.

    Seems like Santander delayed the process with their own issues. But turned the blame game on RBS. Now the British Media knocks down their own Govt. funded National bank because it simply took their gossip "sources" from a Spanish bank's employee.

    And the cow herd on this forum happily swallows this news and follows the group of people throwing stones at their own establishments!


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