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 101.

    98 CO
    "social Darwinism not Darwinism"
    True, however, by virtue of its very name its parentage is undeniable.

  • rate this
    0

    Comment number 100.

    A bit of fun. The German economic cycle.

    Hartz 4 is weirdo. It only makes sense in the context of a 15 year cycle of boom to bust. 5 years developing a competitive edge and 10 reaping the rewards. Doing that during global boom or works nicely. Imposing that across the EU during major global economic head winds, simply demolishes competituon within the EU. German cars for all. Let's ask Ford.

  • rate this
    +1

    Comment number 99.

    The thinking behind Austerity in its different flavours is not monetary, it is business practice it is fiscal. It is not economics it is redistribution of wealth and a drive for competitive business. Each of our major trading partners are doing the same thing and it is known, now, that Austerity has cost some 2-3% pa Real growth for seversl years. Move on, Germany is investing huge sums ~ overseas

  • rate this
    0

    Comment number 98.

    88.sw

    Social Darwinism is not Darwinism. Society is not wild.

  • rate this
    0

    Comment number 97.

    92 94 95 96

    The UK government and BoE require a fix & forget solution to a problem that may take 10 years of tax payers commitment to resolve conventionally.

    Our major trading partner ,EU, has admitted their problems are for 10 years of low growth and economic decline. Merkel's top economic adviser has stated the ¥uro will will be finished within 5 years.

    Fix & forget. Let time do its work

  • rate this
    0

    Comment number 96.

    92 94 95 ~ silly idea? No, unconventional but so was the accounting practice that brought on this nightmare.

    A Repo repaid over 10 years which cannot be drawn down by taxpayers. Where the taxpayers finances are sound, assessed by the banks, the bond offers collateral for reasonable lending. Banks manage the scheme.
    Banking liabilities are leveraged over a decade it will take anyway, to sort out.

  • rate this
    0

    Comment number 95.

    92 94 There is prospect of developing unconventional monetary responses to what remains an asset bubble that will resolve with economic growth or decline.

    One unconventional way forward would be leveraging revenue. That is a refund of tax to ... tax payers of say £10K. That would have to be what is known as a Repo Bond and sit in tax payers bank accounts, repaid over 10 years. Silly idea.

  • rate this
    0

    Comment number 94.

    92 ~ The fact and truth of UK's private banking distress csn only be resolved over time and is made easier in a growing and confident economy. There are political imperatives and dimensions to what was a disaster of idiots running those banks and those warned of the risks.

    Example of the short term damage to growth was Punch Tavers takeover madness which is still being sorted out now.

  • rate this
    0

    Comment number 93.

    What level of asset sales does this figure of £40 billion imply.
    What if the bank sold off citizens in its entirety along with the remaining insurance units. Would that get us near the figure

  • rate this
    0

    Comment number 92.

    Whilst £40bn in today money doesnt sound excessive, that was the size of annual borrowing being seriously worried at in 2008. We have come quite a way since then. Toxic in a growing national or global economy is slightly less risky but growth is difficult to come by because 'this time is most certainly different'. Commiting £40bn to RBS would be a political nightmare.

    It is possible sort this.

  • rate this
    0

    Comment number 91.

    The Arab Spring uprisings are now forgotten, and the old regimes - albeit with new faces at the top - are still in charge. Meanwhile in the west, the same old banking monoliths are still in place, with the same old corrupt practices, albeit with new faces at the top...

  • rate this
    0

    Comment number 90.

    The government should hold onto RBS, wind it down through disposals and shrinking its operations. It also needs to hedge the risks associated with all these toxic assets.
    Perhaps RBS could move to being a more internet based bank as this will be the trend for the future with branch based banks increasingly loss making and not meeting customer needs.
    Obviously all this is done through the BoE

  • rate this
    +1

    Comment number 89.

    Does this not mean the taxpayer takes a double whammy hit?. Northern Rock all over again!

    Would it not be better if Govt & Treasury & BoE are patient & let RBS trade to a position of strength? It may take a decade or two - but would it not have the greatest benefit all round?

  • rate this
    0

    Comment number 88.

    @80 CO

    Your comments are logical but whether they are beneficial or not depends on one's position in the food chain.
    We are back to Darwinism again, I fear.

  • rate this
    0

    Comment number 87.

    #80
    Could feed the fish. At least they die content.

  • rate this
    +2

    Comment number 86.

    What a total mess the grey suits created - the fallout of which has hit the majority of the population in one way or another for 5 years. How much has been cleaned up and how to handle the £40bn that's still left isn't really the issue - ask any pensioner or saver in any bank.

  • rate this
    +1

    Comment number 85.

    #75 FauxGeordie - got to agree. As it happens I think there were numerous people and groups to blame, and that does include politicians and regulators and rating agencies and the people who lied to get their loans in the first place. But that in no way absolves the bankers who made the mess, who are, absolutely, more to blame than anyone else.

  • rate this
    +1

    Comment number 84.

    #78 FG yes less but better constructed regulations is the issue. The option to bankrupt the banks and take action was an issue for Gordon brown and his team which he clearly failed to do.

    all brown was interested in was the TAX take so he could go spend spend spend

  • rate this
    0

    Comment number 83.

    You mean all those horrible loans that got stuck there because RBS decided to copy the Americans and go down the "originate to distribute" line (more here: http://joelghames.wordpress.com/2013/02/14/the-day-banking-died/ )?
    It's really all pretty cosmetic, isn't it? The bad loans are there, and one way or another they've got to be paid for.

  • rate this
    0

    Comment number 82.

    Re: #76.

    Unfortunately (or fortunately depending on your view), none of the senior management who were at the helm of RBS when this issue was created are still in situ.

 

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