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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This column may be a bit quiet for a bit, because I am away from the office.

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  • rate this
    -4

    Comment number 41.

    36 - "Without the EU we are stuffed."

    equally "With the EU we are stuffed."

    Perhaps BAE has spare capacity.

    These thing run in 3's. What's the next deal to fail?

  • rate this
    +2

    Comment number 40.

    Having difficulties off loading UK lame duck banks? Well I never.
    Enough said!

  • rate this
    +2

    Comment number 39.

    35. Brian

    How would it be if you were banking as a Scottish National Bank. If it was to be floated (like Direct Line) from RBS?

    Our fools in the Treasury haven't' got it - that there are too few banks and flogging branches from one to another will not fix the problem. They are daft, substituting apparent change for real change.

    BREAK UP THE BANKS.

    Force the big 4 to flog off regional banks!

  • rate this
    0

    Comment number 38.

    I for one am glad the deal has fallen through. I've only ever had one experience of Santander: when they took over from LloydsTSB the management of Debenham's credit cards. The resulting chaos was enough for me to steer well clear of any product handled by Santander ever since.

  • rate this
    -1

    Comment number 37.

    Yawn. Another obvious attack on British interests by the EU.

    Let RBS keep its branches, and tell the Euro Stazi where to stuff their 'fine'.

  • rate this
    +2

    Comment number 36.

    The Treasury & HMG haven't a clue as how to restructure the banks. They are still completely in awe of the banks. (Not surprising as they have been this way for 20 + years & this CAUSED the crisis.)

    Perhaps a European banking supervision system can do it, but the one certainty is that our incompetents in Whitehall and Threadneedle Street haven't the guts or a clue! Without the EU we are stuffed.

  • rate this
    +1

    Comment number 35.

    As a loyal customer for 22 years of 1 of the 6 NatWest branches in Scotland that was also going over to Santander, I'm ecstatic to hear the sale has collapsed.

    Having had an e-savings account with Santander, there is absolutely no contest between the online banking experience of the two. Next time I'll be quicker off the mark and simply move my current account to RBS as they use the same system.

  • rate this
    +2

    Comment number 34.

    As long as they don't start looking for an apparently benevolent Russian billionaire with a murky past to step in. Perhaps the Chinese would like a toe hold in the market (other than the Hong Kong and Shanghai Banking Corporation that is) (HSBC)

  • rate this
    0

    Comment number 33.

    All these forced changes do little or no good and cause major inconvenience to customers, for whom changing even a branch, let alone a bank, causes nearly as much anxiety as a major operation. I hope I will now not need to change my RBS branch from England to Scotland where I now live, as the curse of Santander seems to have been lifted.

  • rate this
    -2

    Comment number 32.

    Harbingers of disaster? read "European Commission".

    Well time they were told to mind their own ruddy business.

  • rate this
    +8

    Comment number 31.

    Thank heavens this has fallen through. I don't know an RBS customer where I live that was looking forward to the changeover to Santander.

  • rate this
    +2

    Comment number 30.

    I'm with 13 and 27. I wan't to stay with RBS and don't want to move to Santander given their position in the customer satisfaction surveys. I have made the appropriate arrangements. I know several people who have done the same. Perhaps that's the real reason for the collapse of the sale.

  • rate this
    +1

    Comment number 29.

    Ordering a business firm to sell some assets is one of the remedies against public subsidies. RBS got public subsidies. It was ordered to make good. It could have spun off the branches and whatever else it is trying to do now. But it chose to sell the branches to Santander. Its own decision. If it was the wrong one, the authorities should go on an take whatever measures are rightfully available.

  • rate this
    +8

    Comment number 28.

    "...what's on offer may be too small to be floated off as a viable independent standalone bank..."

    It says something about the state of the banking industry if 316 branches with 1.8 million customers truly is too small to be a viable independent standalone bank.

  • rate this
    -2

    Comment number 27.

    Just like Dave has already said, I likewise joined Williams & Glyns circa 30 years ago and I will happily stay if my RBS account is spun off to a new W & G.
    Likewise I don't want to go to Santander, so I've been researching who to go to, rather than have some busybody in Brussels or London tell me what I can/can't do.

  • rate this
    +8

    Comment number 26.

    What is the point of bank branches?

    ATMs and online accounts cheaper and better surely.

    The only point in having a branch is to open an account in the first instance.

    That and trapping unwitting customers into conversations about insurance. Unwanted.

  • rate this
    -1

    Comment number 25.

    Im waiting for the next assault on British banking by the EU now

    They wanted this RBS breakup so mainland euro banks could gain the good part of the british banking sector cheaply. They tried to impose a financial tax to help protect the german banks from its greek debt

    With the banking collapse, the EU see's the perfect opportunity to use its laws for a quick raid at the expense of UK taxpayers

  • rate this
    +2

    Comment number 24.

    I was an Abbey National and I remember the grief I had when Santander tried to absorb Abbey's accounts into their IT systems. Mystery credits, mystery debits, incorrect balances, even a load of random letters and numbers inserted into my address. RBS customers should think themselves lucky. (Well, as lucky as they can be, given that they're stuck with RBS.)

  • rate this
    +1

    Comment number 23.

    Hang on a minute. Wasn't this decision by Brussels due to the govt aid RBS received in 2008? Lloyds were in the same position and have been forced to dispose of 600+ branches. If RBS were now permitted to carry on with the ownership of these branches, I would have thought that was downright unfair on the Lloyds shareholders who have lost a fortune since rescuing HBOS.

  • rate this
    +2

    Comment number 22.

    4.
    David Absolutely laughable comment, you still think that once your money is in any of these bent banks that they consider it to belong to you! Dream on they will continue to use what you think is your money to play banking roulette. Forgotten already why we are in such a mess?
    Try thinking of Fred the shred, RBS, Goldman Sachs, Lloyds TSB, how they gambled, lost & crawled to the taxpayers.

 

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