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 101.

    98. Spindoctor

    Tell the EU to shove it, keep the branches and the customers with RBS.

    Who the hell do Brussels think they are telling the UK what to do?
    Yes indeed, we regulate our banks perfectly well with British law, oh, hang on....

  • rate this

    Comment number 100.

    Will people please not say just Greece. The correct usage is Greece, 100% owned by the EU. You can say Germany as well - its interchangeable with EU.

  • rate this

    Comment number 99.

    98. Spindoctor

    'Who the hell do Brussels think they are telling the UK what to do?'

    While recognising that this is an EU directive I think we should also note that it's UK government policy. Great believers in the free market, they want big banks to sell off branches, encouraging smaller banks to spring up thus increasing competition. Won't work? Well there's a surprise

  • rate this

    Comment number 98.

    Tell the EU to shove it, keep the branches and the customers with RBS.

    Who the hell do Brussels think they are telling the UK what to do?

  • rate this

    Comment number 97.

    Generally as a RBS customer for both my personal and business banking, this all comes as a bit of a relief. Which? has Santander as its lowest ranked bank for customer satisfaction (45%) and, while RBS is not much better at 54%, I have worked out how to have as little interaction with them as possible but still meet my needs without incurring bank charges. Let's hope this is now dead!

  • rate this

    Comment number 96.

    93. kaybraes
    Never heard of the single European Market? THe only thing resembling any sort of bank regulation we get is from the EU, thats why BNP?UKIP and the Hedge funders who bankroll them wan't out.

  • rate this

    Comment number 95.

    Wait - so they had to sell their branches to an even bigger company to encourage competition? I don't get it.

  • rate this

    Comment number 94.

    Trust the professionals, they know best, how to look out for themselves that is.
    They carefully cherry pick their customers whilst quietly not being worth a toss, the piper keeps playing.

  • rate this

    Comment number 93.

    Why and by what right does the EU order a British bank, owned at least in part by the British taxpayer , to sell part of it's (our ) business. The government should be telling the Euronuts in Brussels where to stick their heads. What our banks do is none of their business and if our government allows this level of interference then it is time they removed themselves from office.

  • rate this

    Comment number 92.

    Find it very difficult to feel any sympathy with our Bankers or any Politician.
    Neither should need to be told how to look after money that does not belong to them.
    But they both get away with selling duff products.
    Our Media will accept any Advert,if the price is right.
    Which explains why so many duff products and services will be on this planet long after Bankers,Politicians & Journalists.

  • rate this

    Comment number 91.

    This has all come as a bit of a surprise, after all, no one expects the Spanish acquisition

  • rate this

    Comment number 90.

    Who's faults this then private or government ?

  • rate this

    Comment number 89.

    I am not surprised it fell through.
    1. We need to retain the income and those bank assets in the UK.
    2. Good to see RBS sell off other elements - BEFORE Santander got their hands on UK money
    3. The IT spend must have been very high - wonder what will happen to all those contracts / self employed contractors to enable the sale.....

  • rate this

    Comment number 88.

    #83 which brings me to my next point. internet access is now as important as 1. vehicle fuel 2.gas and electric . the annual rip offs will soon be starting on internet access.

  • rate this

    Comment number 87.

    Why anyone would want to be banking with either of these concerns is beyond me .

    That being said the most likely reason is they just cant afford it.

    Does no one find it bemusing that RBS have to sell off branches because of Government involvement yet in Europe its now ok for public money to be given directly to banks as a bailout ?

    whilst there are paper differences the result is the same.

  • rate this

    Comment number 86.

    No Swing Low at 77 this is nothing to do with Tory/Labour politics. Both would be doing exactly the same at the moment. If the deal with Santander had gone through it would have preserved UK jobs in the branches affected. The greatest threat to those jobs would be if the EU told RBS that if they can't sell the branches they must just close them down. Happily there seem other, better options.

  • rate this

    Comment number 85.

    We are ants run by spiders dressing in silk - bring on Ghengis.

  • rate this

    Comment number 84.


    For goodness sake get into the real world ..update yersel laddie ...luddite!!!!!

  • rate this

    Comment number 83.

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

    doing anything financial or administrative without internet access is becoming more difficult all the time, I know of someone who does, no mobile, no computer, no credit card & apart from the obvious he runs into problems thru having hardly any electronic trail & no credit history

  • rate this

    Comment number 82.

    Wow. What a laugh. I.T issues? yeah of course. Santander have probably come to their senses in they realised all they were actually buying was a load of accounts that RBS didn't want/need. There is also the far bigger issue that the biggest global financial meltdown is just around the corner and they need to keep cash in their pockets, not spend it on some washed out casino circus.


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