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

    Comment number 181.

    any one remember trustee savings bank we all thought we owned it but low and behold we did not,market price discovery,knowing our luck they will all relocate to ireland now the oil is there.
    so it is good for the goose and bad for the gander such is free market capitalism if it still exist,the stgrong get stronger the weak get gobbled up bye bye savings industry,we need a grass roots movement

  • rate this

    Comment number 180.

    If high street banking is profitable then why do banks want to close branches, Most members of the public just want to pay money in and draw money out, get loan when they need it and are seen as a good risk. not to be sold "products" lets get back to good old fashioned banking, when you knew your bank manager on the high street.

  • rate this

    Comment number 179.

    Morning Bob,
    we are still in the mangled wreckage of car crash capitalism,the emergency services have arrived,pulled a few out and strechered them away to hospital,cctv evidence suggest it was a criminal offence by all the drivers speeding in thick fog,unlucky for the passengers on board they got no refunds for the journey,nobody wants the scrap.nobody has been taken to court there must be action

  • rate this

    Comment number 178.

    Santander isn't not reliant on Spain - that part only makes c2.5bn profit! compared to 25bn+ globally! It has the cash and buying RBS it also bought the deposits so it's ratios still get over every stress test. This is down to RBS not being a willing seller and trying to move 2m customers from a latvorm that was built in the 1960s!

  • rate this

    Comment number 177.

    Break up RBS. Bring back NatWest

  • rate this

    Comment number 176.

    "Nobody expects the Spanish acquisition. Our chief weapon is surprise. Surprise & no understanding of complex customers/services. 2 weapons. & an inadequate operating system. Our 3 weapons...".

    Adios useless Santander.

  • rate this

    Comment number 175.

    Santander didn't have to pay £1.5bn. The ability to renegotiate the price was there. They couldn't physically cope with RBS, badly underestimated the size of what they were buying and are not as sophisticated, customer-base wise. Branson route looks more achievable.

  • rate this

    Comment number 174.

    It's all about the money. No was was Santander going to pay £1.5b for assets worth barely £700m.

  • rate this

    Comment number 173.

    Do any of you actually 'get' how complex a merger this was going to be ? Merging 3 building societies is stratospherically easier than merging in a bank, owing to product complexity & sheer diversity in the customer base. RBS weren't 'dragging their feet', both customer & staff propositions were not to be compromised, which is enormously complex work if you think about all the minutiae.

  • Comment number 172.

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

  • Comment number 171.

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

  • rate this

    Comment number 170.

    #115 its undemocratic because the british people were never given a chance to be"in" or be "out" of the eu...therefore all that comes after ,in my eyes, is meaningless and undemocratic...whats the big deal about having a referendum...if we vote "in" then fine I accept that. but dont tell me its "good for me".

  • rate this

    Comment number 169.

    Some must because they happen, they can't happen if a majority of others actively oppose it, rather than condescend to it. Never think it's simple.

  • rate this

    Comment number 168.

    167. 1 question so many answers
    Has it ever occurred to you that people don't actually want war?

  • rate this

    Comment number 167.

    New World order created new war, IE limited not total any more. Korea, Vietnam, Iraq, Afghanistan maybe Iran. But nothing disadvantageous, to Russia or China, that's the reality now.

  • rate this

    Comment number 166.

    165. 1 question so many answers
    The War mongers America stopped war in Europe? interesting theory.

  • rate this

    Comment number 165.

    Funniest thing about Europhiles, is they think they actually kept peace in Europe for 60 years. Reality check, 2 outside superpowers convened a cold war. They did all they could to avoid Mutually Assured Destruction, Anglo / French Suez reclamation was halted by the USA. They feared escalation. Europhiles stop dreaming, war was halted by a new world order. Nobel peace prize as always been junk.

  • rate this

    Comment number 164.

    @131 JfH - " Maybe you don't care about peace, economic stability and jobs and want to create the conditions for war? "

    I think the EU/EZ is a good idea. But the eurocratic grey suits have really stuffed it up and taken parts of Europe closer to civil unrest and war than at any time in the last 60 years. When did you last see swastikas in Athens? What a huge disappointment.

  • rate this

    Comment number 163.

    Does any one care about their ''Branch'' any more? Haven't been inside mine for 6 years, its not as if we have a Capt. Mainwarring type manager any more

    The EU as the Bogey man is just fodder for the red tops..

  • rate this

    Comment number 162.

    158. Name Number 6

    Ohhhh you little teaser, I can tease too. Have a guess.


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