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 81.

    Hope this doesn't leave the cash machines empty :)) I'm glad sure glad, I don't have any deposits here...the last "IT glitch" made me think twice. Good luck RBS treasury!

  • rate this

    Comment number 80.

    Could this be because Santader ..)! would need to hold more money against any new debts that they would be taking on? and if / when spain does take the bail out there will be conditions

    For all practical purposes Santander UK has nothing to do with Spain, as article says its a more ephemeral issue as to whether the group wishes to be perceived as expanding in the current climate

  • rate this

    Comment number 79.

    78. johnm
    Robert - Doh!! How is it a mystery when you get rid of all your experienced IT staff and replace them with muppets off-shore ???????????????
    I think even I could work out how to use a roulette wheel.

  • rate this

    Comment number 78.

    Robert - Doh!! How is it a mystery when you get rid of all your experienced IT staff and replace them with muppets off-shore ???????????????

  • rate this

    Comment number 77.

    So tories have caused more problems for us Labour voters, they would prefer to offer the assets of the UK to foreigners than keep jobs here for our workers.
    The labour party would look after the banking Union members and their interests and grind the operation of these branches to a standstill so they couldnt sell.
    The problem is the Labour party is not in power if it was we would save the jobs!

  • rate this

    Comment number 76.

    I can understand the IT systems staff taking a look at the problem & running away, getting systems of this type to comminicate is a highly specialised task unless by chance they both had similar capability built into them which is unlikely. There doesn't seem to have been any real enthusiasm for overcoming the difficulties by finding the right people to bring in though

  • rate this

    Comment number 75.

    #67 and being told to" have a nice day"

  • rate this

    Comment number 74.

    If I had wanted to bank with Santander I would have done so previously. I did think of transferring to an RBS branch in Scotland but decided to wait and see what happened. Had the deal gone through I would have changed banks as, despite being told that Santander UK is safe I have my doubts. It will be interesting to discover who has already made offers to buy.

  • rate this

    Comment number 73.

    Make it a nationilised bank and call it wiliams and glyns, its a profitable bank so keep it under public ownership but run it to make profits for the tax payer.

  • rate this

    Comment number 72.

    Santander have decided they would rather invest in F1, especially those pretty young ladies in red dresses.
    Lady in Reddddddddddddd.

  • rate this

    Comment number 71.

    Who Would want to buy any part of a british bank with their immoral and outright corrupt practices who can blame them i wouldent touch them with a barge pole maybe the govt should start a new not for profit bank where people can put their wages and savings with out the threat of the bank going kaput with their shady dealings

  • rate this

    Comment number 70.

    if you want to remain an RBS customer but dont use the branches ring them up and ask them for a form to move your account to a scottish branch to avoid the sale.

    They cant inform you to do this under EU laws but you can then carry on with your account and keep all your online banking and phone app banking without any problems.

    If you need to use a branch u can use natwest to pay in cash.

  • rate this

    Comment number 69.

    as with most of the ram shackle thing that is europe and the eu......i got this thing that spanish banks still have blokes on donkeys taking the money over hills in saddle bags every day , watching out for latter day butch cassidys and sundance kids making a hit.

  • rate this

    Comment number 68.

    Could this be because Santader (or dan dare as we also know them)! would need to hold more money against any new debts that they would be taking on? and if / when spain does take the bail out there will be conditions?!
    Also if RBS can wriggle out of the branch sales does that mean lloyds can as well?!

  • rate this

    Comment number 67.

    #60. ronnieboy1

    "#26 whats happens if you dont have access to a computer?"

    You are doomed to endless personal questions about whether you are happy about your insurance/pension/car recovery etc.

    And what to do with 5 year old bank statements.

  • rate this

    Comment number 66.

    A great many English RBS account holders were sufficiently terrrified of the Santander track record in "customer service" to transfer their business to a Scottish RBS branch. Indeed, the volume of such transfers was such that RBS needed to create a department to handle this. I wonder if Santander got wind of the diminishing numbers of accounts they would acquire? I for one am glad the deal is off.

  • rate this

    Comment number 65.

    59, if Santander wanted to wield the barge pole, they should have done so before agreeing to buy the branches etc. Any sale is a agreed between two parties, a seller and a buyer. One party should not retrospectively decide it was a bad deal.


  • rate this

    Comment number 64.

    It would be interesting to find out how many people switched their accounts away from Santander when news that spanish banks were under pressure made news in the UK.

  • rate this

    Comment number 63.

    @55 Our government cannot tell RBS or for that matter any other bank to sell its branches off, why can the EU?

    Not quite true. Part of the bailout deal was that branches of lame duck banks have to be sold off to try to claw back some of the wasted taxpayers money...

  • rate this

    Comment number 62.

    I agree they need to be less powerfull but there are other ways to break them up than just pass them to another bank for that bank to become huge.

    I wanted to stay with RBS because I have been with them 25 years so I moved my branch to a scottish branch.

    If you live in England and want to remain with RBS move to a scottish sort code now before they sell it to someone else unsuitable.


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