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 121.

    120. bangers64

    Simple, just as ronieboy1 pointed out. They will continue to rerun votes, bribing the people until the "correct" result is achieve.
    Or phrase the question in a referendum to get a desired result like the did in the AV vote.

    What makes you think the UK is democratic with an unelected Head of State and a minority Government?

  • rate this

    Comment number 120.

    115. Name Number 6
    "How is the EU undemocratic? The members of its parliament are elected."

    Simple, just as ronieboy1 pointed out. They will continue to rerun votes, bribing the people until the "correct" result is achieve.

    Further, there is aboslutely no achnowalgement within the EU corridors of power of the raising anti EU centement in many country's including Germany

  • rate this

    Comment number 119.

  • rate this

    Comment number 118.

    Santander is at least a retail bank first and a dodgy investment bank a long way 2nd. Its financial health is also streets ahead of RBS.

    Yes it is unpopular because it is a foreign bank and very successful!

    As a tiny shareholder (thanks to the privatisation of Girobank) my shares have done a lot better with Santander than they would had I been foolish enough to buy any in the ruinous RBS.

  • rate this

    Comment number 117.

    It's just another potential deal that's not happening, if it was not banks involved it would hardly make news.

  • rate this

    Comment number 116.

    108. Dr_Ads

    I am not a nationalist - but if you force us down the nationalist route then I am sure most Scots would be happy to bail out RBS in return for all the Oil Revenue that has been squandered by successive Westminster governments.

    However back to the point of the article the EU should be told to get stuffed and RBS and Lloyds should keep their branches if not we stop paying into the EU.

  • rate this

    Comment number 115.

    114. ronnieboy1
    How is the EU undemocratic? The members of its parliament are elected.

  • rate this

    Comment number 114.

    they are both undemocratic so fine. the result would be.... royal family ...the only thing is,unlike in ireland, where they had about 3 elections to get a yes vote...this is 1 vote.

  • rate this

    Comment number 113.

    112. ronnieboy1
    #110 if the eu is so great, you have no objection in us voting on it then. in or, according to you, its so great we will all vote..... in.
    Do you a deal vote on the EU if we can vote on the Royal family.

  • rate this

    Comment number 112.

    #110 if the eu is so great, you have no objection in us voting on it then. in or, according to you, its so great we will all vote..... in.

  • rate this

    Comment number 111.

    Has not Santander already part paid for these banks? The costs RBS must have incurred so far will not be small. Do RBS get these paid by Santander?

    Is it not also about time the Commission realises that EU rules are going to become a lot more flexible in our present economic circumstances? On taxation for instance?

  • rate this

    Comment number 110.

    109. Comfortably Numb
    The EU is the best thing that has ever happen to Europe, or would you prefer to go back to having disastrous wars every 20 or 30 years?

  • rate this

    Comment number 109.

    107. Name Number 6

    No... not at all.

    It has evolved form a trading arrangement into a financial institution that is damaging local economies and imposing measures that would otherwise be rejected. It is not qualified to determine national economic policies. It is a super-quango!

  • rate this

    Comment number 108.

    Have the EU forced the German government to divest itself of the banks it bailed out? Of course not...

    But regardless of that, the people who should buy the government out of RBS are the Scots taxpayers, it's a Scottish bank, that was run into the ground by the combination of a Scottish CEO, a Scottish PM & a Scottish chancellor - the English taxpayer should be paid back (with interest) now.

  • rate this

    Comment number 107.

    105. Comfortably Numb

    This European Commission outfit seems to be nothing more than a great, big economic pain in the proverbial.
    Are you suggesting it was the EU that caused the Worldwide recession and not Gordon Brown?

  • rate this

    Comment number 106.

    I am not surprised, even NatWest and RBS branch systems don't talk to each other. As a Natwest customer in Scotland wth a branch in England, I have still yet to be told how I would be able to do my branch banking once my local Natwest in Glasgow was sold off. You would think you could go into one of the many RBS's in Scotland. Unfortunately you can't.

  • rate this

    Comment number 105.

    This European Commission outfit seems to be nothing more than a great, big economic pain in the proverbial. Creating havoc and expense... because they are allowed to. You usual bunch of european incompetents. The same continental mindset that created that economic beauty... The Euro... (cue drum roll!).

    The sooner we leave them to it, the better.

  • rate this

    Comment number 104.

    As a customer of RBS since it took over William&Glynn in the 80's we are delighted the transfer has fallen through.For the past twenty five years we have received excellent service from its Norwich branch and dreaded the switch to Santander,a bank which regularly features in the complaints section of financial pages.

  • rate this

    Comment number 103.

    Has anybody thought that the bank branches are simply overpriced?

    And that the government will not be as eager as before to bail out banks should they get into trouble?

    Put simply - these branches are well past their sell by date.

    Who wants to buy a pig in a poke? ....

  • rate this

    Comment number 102.

    I will give them ten bucks fifty for the branches, they can keep the customers. Problem solved.


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