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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +3

    Comment number 21.

    #15.johnm
    I worked for RBS IT for 14 years, I knew the systems well. I remember one senior IT executive at RBS remarking that the IT systems were not rocket science. Well you reap what you sow.
    ///
    Well said. Your example reveals the usual short sighted, short termism and maximum profit thinking of British executives in far too many key places, and has been for decades unfortunately.

  • rate this
    +2

    Comment number 20.

    Whty was it difficult because RBS made it difficult. They didn't really have to worry about their customers, after the PPI fiasco most people with any sense realised what sort of bank they were and decided to close their accounts.
    The real difficulty is intransigent bankers more worried about themselves than their customers. Nationalise RBS without compensation & offset taxpayers funding.

  • rate this
    +4

    Comment number 19.

    That right the UK government spending billions proping up a scottish bank, only to split the bank up, small enough for forgien investors to buy up the profit making parts, leaving the UK with the debt and the loss making buisness

    Did they ever go to buisness schoool?

  • rate this
    +4

    Comment number 18.

    Cant see why We cant simply Breslau them up and give Each Person in the uk some shares in new entity and eventually list them totally separate from RBS

    Everyone wins and start to get more competition Plus some people Might want sell shares once listed

    This would be a better way getting cash into peoples pockets rather than helicopter drop of free money

  • Comment number 17.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +3

    Comment number 16.

    Why do the financial resources for Santander UK need to be discreet? Is there some sort of delicacy or other need for privacy? I could understand it if they needed to be discrete though.

  • rate this
    +8

    Comment number 15.

    I worked for RBS IT for 14 years. Like most people they got rid of, I knew the systems pretty well. I remember one senior IT executive at RBS remarking that the IT systems were not rocket science. Well you reap what you sow.

  • rate this
    -4

    Comment number 14.

    its branches

  • rate this
    +7

    Comment number 13.

    I joined Williams & Glyns 30 years ago and I will happily stay if my RBS account is spun off to a new W & G. However, like many others, I will leave the instant my account is 'sold' to a new bank, as I was planning to do when Santander took over.

    I am not a commodity.
    I am not a number.
    I am a free person with a will of my own - remember that Mrs EU Commission.

  • rate this
    -1

    Comment number 12.

    If there is no patriotism, there is no country.

    There is only business.

  • rate this
    +1

    Comment number 11.

    Robert - what does this mean, if anything, for the Lloyds/Co-op deal do you think? Another fiendishly difficult IT integration (integration of Britannia onto Co-op then integration of Co-op onto a clone of Lloyds TSB, I understand) and an even taller order to sell to customers (as there will, in England, be another Lloyds TSB branch just down the road if they don't want to move banks)

  • rate this
    +2

    Comment number 10.

    NatWest made a big mistake when it became part of RBS but to allow Santander to take over RBS would have been a financial disaster for not only RBS customers but banking in general. I agree with watriler's comments, spot on.

  • rate this
    +2

    Comment number 9.

    So RBS have tried, and failed, to sell 316 of it's branches. The reason, it appears, is that no one else wants to buy them.

    That seems fair enough to me.

    But for then European Commission to impose a fine on RBS because no one wants to buy it's branches seems almost childish. What else is RBS supposed to do, give it's branches away ?

  • rate this
    +2

    Comment number 8.

    If the carve out has pretty much happened, time to resurrect the Williams & Glynn's Brand and trade it separately.

  • rate this
    +1

    Comment number 7.

    The solution is in the hands of HMG who on the one hand could restructure the supervision of this state organisation introducing staff and customers to the Board and setting the pace in competition, governance and service standards. Then on the other hand tell the Commission that it now does not need to downsize as it will use RBS to operate in the national interest.

  • rate this
    0

    Comment number 6.

    Do the European Commission know much about banking? About as much as they know about farming! Enough is enough, RBS, owned by us, has sold plenty and since there are no takers for this part of the business they should leave well allone either until they know what they're talking about or the market improves. Santander doesn't need it, their Latin American business is doing really well.

  • rate this
    +2

    Comment number 5.

    They are blots on the landscape.An embarrassing reminder that the last thing our debt-saturated Western economies need is more debt!

    We need real economic growth that can ONLY come from capital formation and productivity i.e people actually >working< in productive industries and having the capacity to save surplus income.


    .

  • rate this
    +8

    Comment number 4.

    The Treasury could escape from this particular Catch 22 by asking the RBS customers of the banks concerned if they want their bank to be sold to another, possibly overseas organisation. They , after all should have a say in what happens to their own money.

  • rate this
    +2

    Comment number 3.

    Is this not an excellent example of political (EU and Domestic) interference in markets that they cannot control? Government can't get its cake and eat it. For those that require the industry to be punished perhaps a better focus on criminal prosecutions as opposed to restructuring (long after the horse bolted, the stable burned and the site went fallow) might deter mal practise in the future.

  • rate this
    +2

    Comment number 2.

    As if it wasn't bad enough our being shaftet by our own people, now they wanted to invite their friends on the continent to have a go too

    Now that has fallen through and they are stuck (for the time being) with 316 branches that are costing them money. My heart bleeds for them

 

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