Should the Treasury keep 'bad' RBS?

RBS logo The Treasury is not keen on breaking up RBS

The Parliamentary Commission on Banking Standards is deliberating on its final report, which - I am told - is unlikely to be published before June.

A tricky issue for it is how to respond to the recommendation from the Governor of the Bank of England that Royal Bank of Scotland should be cleaved in two, with the remaining toxic assets - and they are pretty stinky - retained in the public sector, while "good" RBS is privatised.

As it happens, for all the criticism of RBS, it has done a pretty effective job of shrinking its non-core and poor assets from many hundreds of billions of pounds to several tens of billions of pounds.

But what remains is pretty horrible and hard to shift.

And the argument of the Governor of the Bank of England would be that - by cutting out these poisonous assets - RBS would be strengthened both financially and psychologically.

On the one hand, the ratio of capital to assets would be boosted very significantly in "good" RBS, because some loans and investments with very high risk weights (in the jargon) would have been detached.

And, perhaps more important, both those who work for RBS and those who lend to it would be more confident that some further downturn in economic conditions was not going to generate humungous additional losses.

So RBS might find it cheaper to borrow, and it might also have a greater appetite for risk when lending.

And the UK economy would therefore be a winner.

Stagnant pool

What's more, RBS's board would be pretty happy if the bank was cleaned up in this way, I understand, for a pretty obvious reason.

Clean RBS, minus the toxic assets, would be much easier to privatise than the existing RBS.

So why hasn't it happened? And why is the Treasury still very resistant to the idea of breaking up RBS in this way (which it is)?

Well, as I understand it, the Treasury looked at a break up of this sort just a couple of years ago.

And the primary reason it did not want to go ahead is that it would have to find a way to fund these assets, these loans and investments: the amount owed to RBS in this stagnant pool of assets is matched by funds RBS has borrowed; so the government would have to borrow to cover the written down value of the bad banks' assets.

The amount of new gilts it would have had to issue a couple of years ago to set up the bad bank was prohibitively great. But by the end of this year, the funding requirement would be "just" £40bn.

However that is a large amount of additional borrowing for a government struggling to reduce its annual deficit, or borrowing needs, from an unsustainably large £120bn.

And there might be an unfortunate precedent for the Treasury if it were prepared to borrow £40bn to sanitise RBS, because its critics might question why it won't do the same to finance substantial new infrastructure projects.

But if the Treasury is wary of breaking up RBS, the Banking Standards Commission does not look to me to be keen to drop it altogether as an idea,

If it were to ask the Treasury to properly evaluate the costs and benefits of breaking up RBS, and publish such an evaluation, it would be difficult to see how the Chancellor could refuse.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 21.


  • rate this

    Comment number 20.

    As the value of the toxic assets in RBS accounts (in line with normal accountancy rules) has been written down to a fair resale valuation, then they should no longer represent a significant risk. There is a very strong argument presented in the Vickers report for separating retail and investment banking. The toxic assets are a mill-stone for investment bankers to avoid speculation and gambling.

  • rate this

    Comment number 19.

    Just a suggestion... why not lump all the really toxic debt on those who acted recklessly and are now happily early-retired / living abroad on the ill-gotten gains on their actions...

  • rate this

    Comment number 18.

    Rather like the newspapers I would like to 'reject' any liability for bad debt and only get profits from the good bank. Is that ok?

  • rate this

    Comment number 17.

    If Salmond and his separatists get their way, let THEM keep RBS and they can 'sanitise ' it and its toxic assets.
    RBS headquartrers are in Edinburgh, after all.

  • rate this

    Comment number 16.

    Why are people using the word bad and bank in the same breath? Enough already! Time to move on.

  • rate this

    Comment number 15.

    Just let the big banks fail, it will hurt in the short term but will save on a decade of austerity and flat growth. We have never thrown so much cash at any other industry like the Banking sector, not one penny more to the spivs.

  • rate this

    Comment number 14.

    The way I see it the taxpayer could benefit in two ways. Firstly, demerger Natwest and sell as a going concern...this should satisfy the European union on the compulsory branch sale by retaining the RBS branches. Use the RBS branch network to distribute benefit payments of all kinds...Your account number is your NI number...should you ever require benefits in you lifetime...endless possibilities!!

  • rate this

    Comment number 13.

    Close RBS
    Sack all investment bankers - there are plenty capable people who would manage the sale for much more modest salaries

  • rate this

    Comment number 12.

    Sorry Robert
    Could you clarify the situation?
    Will it be "The Treasury" picking up the billl?
    Or our Politicians?
    Or UK Taxpayers?

  • rate this

    Comment number 11.

    Why the hell should WE have to take the Dross again......

    They got themselves into the hole they are in, let the experts get themselves out of it, and while we are at it , each year they can buy back off us at the price WE paid , shares equivalent to the size of the bonus pool they give out.

    Why should one bank get preferential treatment its like rewarding a murderer for killing more people.

  • rate this

    Comment number 10.

    Splitting the bank as described would be good for RBS, shareholders and investors. But, Robert why is it good for the economy? Is the chunk held by the state dragging down the public sector somehow outside of the economy?

  • rate this

    Comment number 9.

    The whole point of politics UK post Thatcher is that the banks and the City have to be protected, nurtured, no matter what.

    Precisely why the bad bits will be left with the UK public.

    So those awfully clever City types can be allowed to run off and make more profits out of ripping us all off.

    Better get used to it. There is a whole load more coming.
    And going to Gideons chums.
    It's what they do

  • rate this

    Comment number 8.

    We will never get the money back, so time to move on. Flog of the good bits and get a bit of bread on the table.

    It will be interesting to see what are the bad bits nobody wants. I bet its the bit where all the bonuses were to be made once upon a time when the world was run by the Masters of the Universe with their gold credit cards. Gold credit cards! It makes you laugh, doesn't it!

  • rate this

    Comment number 7.

    purps has hit the nail on the head, split into three parts:
    Coutts as the wealth management arm
    Natwest as the English clearing & regional bank
    RBS as the scottish regional bank with all the junk backed by N Sea Oil.
    This would clearly 'kill' birds with one well aimed stone. Sadly it is simply too simple so will never happen.

  • rate this

    Comment number 6.

    RBS continues massive forebearance for zombie property investors - no point repossessing as few buyers. Zombie's drag down all around them & perptuate the recession that we are "not" in - as RP implies why not spend the money on infastructure - or better still, rebates for taxpayers!

    If failures had been allowed 4-5 years ago the worst would be over by now. As it is this will roll on for years.

  • rate this

    Comment number 5.

    So do the evaluation.

    If it can be shown - clearly - that we, the taxpayer, would be 'strengthened both financially and psychologically' (ie it would cost us less in the end) by undertaking this split, rather than just RBS, then do it.

    If not - dont! And who cares if the board are happy or not.

  • rate this

    Comment number 4.

    why spend £40 Billion to split the bank and maybe help the bank a little.

    Spend £40 Billion on infrastructure and Housing would mean more affordable housing, good for all, more jobs which means more tax revenue, more growth.

    Alot better ways to spend £40 billion than helping a bank which may or may not be of any benefit to the uk taxpayer whereas infrastructure and housing would be

  • rate this

    Comment number 3.

    The government is bankrupt of any ideas for the future apart from socializing the losses and maintaining the corrupt and perverse status quo for the stinking rich(who would otherwise be bankrupts). The rich don't suffer as in the twenties and thirties, no need to throw yourself out of a building now, the fascists are in charge, the less fortunate must subsidize them.

  • rate this

    Comment number 2.

    So is this just a sophisticated way of applying the old principle of socialising losses/debts and privatising the gains or profits. RBS should be retained in the public sector so that the state can gain access to to the profits to cover the losses on bad debts and decide on appropriate forbearance on sick assets over a lengthy period. It could also run RBS as an competitive exemplar.


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