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
    0

    Comment number 61.

    Santander acquired Antonveneta as part of a threeway break-up bid for Dutch ABN AMRO, which valued the Italian bank at about $9.66 billion including corporate arm Interbanca and sold at $13.2 billion to Banca Monte dei Paschi di Siena. A spectacular deal.

    »

  • rate this
    -1

    Comment number 60.

    Just offer the whole lot to Alex Salmond.

  • rate this
    0

    Comment number 59.

    38. tdc1985

    Try not to use just the first dictionary you find in Google. You'll gain a more rounded viewpoint.

  • rate this
    0

    Comment number 58.

    When I first became a customer of RBS (due to its takeover of Williams & Glyns) it was the best bank in the country. Now it's the worst. How the mighty have fallen.

  • rate this
    +2

    Comment number 57.

    @ Economically Ignorant

    Congratulations! You have chosen the perfect name for an SNP apologist.
    Tell me, what does the 'S' in RBS stand for? You cannot wish that away.

    PS I belong to Glasgow, even if I now live in Auld Reekie

  • rate this
    -5

    Comment number 56.

    Lucky white heather you're about as Scottish as Jellied Eels and to the people voting me down truth hurts eh !

  • rate this
    -3

    Comment number 55.

    @ Stuart Wilson

    But it still has to be approved by Westminster who would've have seen this as a no brainer yes ?.
    @ Black Pearl
    Lloyds didn't bale out RBS they baled out HBOS and all governments are the same in any case.
    @JusticevJustice
    RBS won't go the government will bale them out again because they have too much liability to the country to not do

  • rate this
    -1

    Comment number 54.

    17. Lucky White Heather
    "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..."

    You sound a little vindictive.

    The govts that allowed the folly were UK Govts, not a Scottish one. The UK was happy to bask in the illusion of banks' success now the pain also has to be shared.

  • rate this
    0

    Comment number 53.

    and i am being serious here, what happens if RBS goes? what will happen to our mortgage? will we still get the same deal or what? any advice very welcome!
    i have to say though, this is the best bank that i have ever dealt with, the staff are fantastic, never felt left down by them at all.

  • rate this
    +3

    Comment number 52.

    @46.Economically ignorant
    "...how can people say RBS is Scotland's problem when there is very little Scottish influence in their infrastructure."

    Because the law governing the charter of the Royal Bank of Scotland was ratified by Scottish law. English/Welsh law has no jurisdiction in Scotland.

    "he was an English King"

    No more English than Bonnie Prince Charlie was a Hamilton Academical fan.

  • rate this
    -2

    Comment number 51.

    I agree Goodwin is a disgrace but he's only a small part of the whole banking philosophy making money by speculation on everyday human necessities. How is that fair and my point on London is that the whole focus of this country is on them, while the rest fight for the scraps do you think that is honestly a good thing ?

  • rate this
    +5

    Comment number 50.

    @43

    As a patriotic Scot, I am ashamed of Scottish Goodwin and the bad management of a Scottish bank.
    How on earth can you blame this failure on London? Explain, please.
    Thankfully as part of the Union there had been a bale out, and our savings have been rescued.

    And what has German George got to with it?

  • rate this
    +2

    Comment number 49.

    Fred Goodwin, the Labour Party, more importantly their donators and backers, who supported them over the years, be made legally responsible like 'Lloyds names' for all of the toxic debt created under their 13 years as directors of the UK

  • rate this
    +1

    Comment number 48.

    46
    Well, I think that Alex Salmond is earnestly hoping that you are correct and that he will not be asked to pony up in the event of an independent Scotland.

  • rate this
    -1

    Comment number 47.

    mmmmmm , i have a current account mortgage with the RBS, what will happen to that if they go?

  • rate this
    -3

    Comment number 46.

    He certainly wasn't Scottish forgive my historical ignorance but he was an English King seriously how can people say RBS is Scotland's problem when there is very little Scottish influence in their infrastructure.

  • rate this
    +3

    Comment number 45.

    44
    Fair point. George 1 couldn't even speak English and was more German than anything else.

  • rate this
    +4

    Comment number 44.

    @43.Economically ignorant
    "King George I who's English"

    Are you sure?

  • rate this
    -6

    Comment number 43.

    The highest rated comment on here relates to RBS being Scottish, can we just clear one thing up here, RBS is only Scottish in name and the headquarters being in Edinburgh. It might now be owned by the state but prior to the crash it had little to do with Scotland and everything to do with London it was also bailed out by Westminster, NOT SCOTLAND it was also founded by King George I who's English

  • rate this
    +2

    Comment number 42.

    Why not pay the toxic assets out as bonuses?
    Alan

 

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