Q&A: RBS 'bad bank' explained

RBS The UK government bought the shares in RBS at the height of the crisis at just over 500p a share

Related Stories

Royal Bank of Scotland has announced it will not split itself into separate "good" and "bad" banks.

After reporting the biggest loss in UK corporate history at 2008 at the peak of the financial crisis, RBS was bailed out by the government and remains 81%-owned by the taxpayer.

There was much speculation that the bank would be split in an effort to restore profitability - but now that will not happen.

What is a bad bank?

When a bank runs into trouble, its balance sheet is usually weighed down with worthless loans. These assets are so poor that their losses outweigh any potentially profitable parts and prevent the bank from lending out money.

Without being able to lend more money, which is the point of its existence, a bank can't generate an income.

One way of dealing with this is to take out all the toxic assets from the so-called good bank, and put them with a bad bank, to be run by the government. That way the bank can get on with the job of being a bank and the government can deal with managing or selling off the bad assets in a measured way.

The best example of this is the 1990s Swedish banking crisis. Following a property boom in the 1980s, the inevitable bust followed, leaving most of the biggest banks in the country insolvent.

Sweden created two bad banks to take on the bad debts of its biggest banks. Securum, one of the bad banks, was created in 1992 and wound down in 1997, when the economy recovered and the banks had healed.

More recently, Ireland's overloaded banking sector collapsed following the banking crisis and the state formed the National Asset Management Agency - which is still going - to manage all the bad assets of its insolvent lenders.

In the UK, there is a recent precedent.

Northern Rock was nationalised in 2008, and the bank was split into two in 2010. Virgin Money bought the good part and the bad bits are still held by the government-owned Northern Rock (Asset Management) Plc.

Start Quote

The new plan is for RBS to somehow get rid of up to 70% of this radioactive debt - which contains the worst of the bank's commercial property and Irish lending - over two years, with a hope that perhaps it can all be gone within three years”

End Quote

Why was there speculation that RBS would be split up?

At the end of March, RBS still had £54.6bn of what it calls non-core assets - or the toxic assets that would make a bad bank.

The then-Bank of England governor, Lord King, in March told the Parliamentary Commission on Banking Standards that there was a good bank and a bad bank. He added: "RBS is worth less than we thought and we should accept that and get back to finding a way to create a new RBS that could be a major lender to the UK economy."

Talk of splitting the bank grew after his comments but, in the end, the Banking Standards Commission did not call firmly for the splitting up of the bank in its report in June, instead urging the Treasury to carry out a forensic analysis of whether RBS actually needed to be restructured, which the commission did not have the time to do.

Chancellor George Osborne said he would look at a split of the bank but he did not want "a quick sale of our RBS shares".

The bank has now said that it will create an internal bad bank to "manage the run-down of high-risk assets" of around £38bn by the end of 2013. "The goal is to remove 55-70% of these assets over the next two years," RBS says.

So instead of splitting the bank into two, the bank is to create an internal bad bank full of its toxic assets.

What actually is an "internal bad bank"?

It means RBS's poor quality assets will be managed separately within RBS itself - under the name RBS Capital Resolution Group - rather than outside the bank by the government as it did with Northern Rock's worst bits.

This means that RBS still thinks it can solve its own problems and there is still some value to be extracted from these assets. It plans to sell the assets within three years.

The BBC's business editor Robert Peston said "perhaps most embarrassingly" RBS lacks what the bank calls the adequate "momentum" to generate the relevant capital it needs simply by generating bigger profits, so it needs to fix the bad assets on its balance sheet by selling them quickly at firesale prices.

Whether RBS will actually be able to sell these assets, keep enough cash on its books and lend more in those three years is open to question.

When will the government get its money back?

According to Mr Osborne, the move will make it easier to return RBS to the private sector.

The then-Chancellor, Alistair Darling, invested £45bn into RBS in 2008 order to save it. The government bought shares in RBS at a price of just over 500p, but they are currently trading at around 360p.

The bank's previous chief executive, Stephen Hester, said in the summer the Treasury would get its money back, but that privatising RBS could take up to 10 years. Many people want the bank to pay back that money much more quickly.

The situation at RBS contrasts with the other bank to receive UK government aid, Lloyds.

In 2008, the government injected a total of £20.5bn into Lloyds, buying shares at an average price of 73.6p.

Lloyds' shares are currently trading above this price, and in September the government sold a chunk of shares, reduced its stake in the bank from 39% to 33%.

Further sales of Lloyds shares are under consideration, although there is no fixed timetable.

More on This Story

Related Stories

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

BBC Business Live

  1.  
    09:28: Italian jobs

    Unemployment in Italy has reached a record high of 13.2%, according to official figures for the month of October. It's the largest percentage since figures were first collected in 1977. Even worse news for 15-24 year olds in the country - 43.3% were unemployed last month.

     
  2.  
    Black Friday Sgt Paul Marshall, Kingston Police

    tweets: "Even on #BlackFriday shoving people to the floor so you can get £20 off a Coffee Maker is still an assault."

     
  3.  
    09:12: Markets update

    European markets are lower this morning on the back of falling oil prices, which are nearing $70 a barrel. They've not been that low in four years.

    • The FTSE 100 is lower by 0.74% at 6673
    • Germany's Dax is lower by 0.47% 9928
    • France's Cac-40 is lower by 0.53% at 4359
     
  4.  
    09:05: House prices
    Graph showing house price growth since November 2004

    The annual house price has been falling since June, when growth peaked at 11.4%. Now it's only 8.5% higher than this time last year. It's worth remembering that house price growth is coming off a low base as well. Property values (that's the average for the whole of the UK) only began to rise in the summer of 2013, as the effects of the Funding for Lending and Help to Buy schemes began to be felt.

     
  5.  
    Black Friday Kadhim Shubber, reporter at the FT
    Asda

    tweets: "Unleash the capitalism #BlackFriday" (Click through for the full Vine video)

     
  6.  
    Black Friday Bryan Roberts, director at Kantar Retail
    Asda

    There are cheerleaders in Asda. Really. Bryan tweets: "Cheerleaders. This is my job. Honest."

     
  7.  
    08:24: Building Lego
    Malaysia Lego

    UK theme park operator Merlin Entertainments has announced it will open a new Legoland... in South Korea. The attraction is expected to open its doors in Chuncheon, Gangwon Province by 2017. There is already a Legoland in Malaysia, and the firm plans to build one in Dubai too.

     
  8.  
    Black Friday Bryan Roberts, director at Kantar Retail

    tweets: "6 minutes ago, this was a massive pile of TVs"

    TVs
     
  9.  
    Black Friday Sarah Butler, The Guardian

    tweets: "Crazy queues at Asda, but all calm and very British queue in place... So far"

    Black Friday
     
  10.  
    08:10: Black Friday

    Richard Main, a reporter at BBC London 94.9, emails in: "More than 150 people are now queuing to get into Asda on Edgware Road, in the hope of bagging a Black Friday deal. Police were called to the store in the early hours of the morning to control crowds. The current queue now stretches the length of the car park and is being penned in by a wall of shopping trolleys."

     
  11.  
    Black Friday Greater Manchester Police

    tweet: "At least two people arrested at #BlackFriday sales events already this morning. Keep calm people!"

     
  12.  
    08:02: Black Friday
    People sort through boxes of shoes in Macy"s

    A bit of Friday fun now. We want your best/worst Black Friday deals. What's the most ridiculous sale item you've seen or bought? What's be best/worst discount you've seen? Have you seen punch-ups over the last sale item or is everyone queuing politely? Send your stories/pictures/experiences/views of Black Friday to bizlivepage@bbc.co.uk or tweet @bbcbusiness.

     
  13.  
    07:45: Betting campaign BBC Radio 4
    Betting terminal

    The maximum stake on gambling machines known as "fixed odd betting terminals" is £100. Many think that's outrageous, as it's possible to lose an awful lot of money in a very short time. Now more than 90 councils in Britain are campaigning to have that reduced dramatically - to £2. Sir Robin Wales, the mayor of Newham in London, tells Today that gambling firms deliberately target poorer areas.

     
  14.  
    07:34: House prices
    Graph showing the average house price to average earnings ratio

    One thing to note in the latest Nationwide figures is the price-to-earnings ratio, which has tailed off ever so slightly. This measures how high house prices are, relative to the average person's salary. The higher the ratio rises, the less affordable housing becomes. Since WW2, each time average house prices have reached six times average earnings, there as been a crash.

     
  15.  
    07:22: House prices

    The price of an average house in the UK rose by 0.3% in November to £189,388, according to the latest figures from Nationwide. Overall, however, the growth in house prices slowed to 8.5%, when compared to November of last year. It was 9% in October.

     
  16.  
    07:12: Energy penalties
    Drax

    "We are deeply disappointed with the magnitude of the fine," said Drax boss Dorothy Thompson. But Ofgem's Sarah Harrison says the firm "missed its target by a clear margin" and accuses it of "disadvantaging several thousand households in some of the most deprived areas in Britain".

     
  17.  
    07:06: Energy penalties

    Another generation firm, Intergen, is also facing an £11m payout. The companies failed to meet targets to insulate homes under two energy efficiency schemes that ran until the end of 2012. The failings meant that households did not receive the energy saving measures, which would have helped to reduce their bills.

     
  18.  
    07:00: Energy penalties

    The power generation company Drax, based in North Yorkshire, has been hit with a £28m financial penalty after failing to meet targets to provide energy efficiency measures to homes. It's the largest penalty ever handed down by the energy regulator Ofgem.

     
  19.  
    06:58: Black Friday Radio 5 live

    Ms Burge tells Wake Up to Money that over the last couple of years retailers and consumers have "engaged in a game of chicken". Consumers have started holding out on retailers, she says, in the knowledge that the closer they get to Christmas, the more likely they will be to get a deal as retailers start discounting.

     
  20.  
    06:45: Tech terms

    More from Andrew Miller on tech firms' terms and conditions. "They are often laughably long and written in the kind of legalese you need a law degree from the USA to understand," says the Labour MP for Ellesmere Port and Neston.

     
  21.  
    Via Twitter NASA
    Pic of a star being sucked into a black hole

    If you don't really get all this Black Friday stuff, it's not really your bag or the fact that the spirit of Christmas has been lost in worship to Mammon is getting you down, NASA has a solution for you. It tweets: "It's #BlackFriday, but for us, it's the 2nd annual #BlackHoleFriday. Today, we'll post pics & info about black holes".

     
  22.  
    06:32: Tech terms

    The chairman of the Science and Technology Committee, Andrew Miller, told the BBC: "I simply cannot say to a constituent of mine I know with 100% certainty what they're doing with that data because frankly I don't understand those legal terms and conditions".

     
  23.  
    06:26: Tech terms

    MPs are calling for social networking companies, such as Facebook and Twitter, to explain more clearly to users what they do with information collected about them. The Commons Science Committee says the firms' terms and conditions agreements are far too long and complex for any reasonable person to read.

     
  24.  
    Via Twitter Alistair Charlton, senior technology reporter at IBTimes UK
    Black Friday

    tweets: "Tesco website down, Currys website down, shopping chaos caught on video. It's #BlackFriday."

     
  25.  
    06:12: Black Friday Radio 5 live

    Natalie Burge, retail analyst at Planet Retail, says Black Friday is a "really strange phenomenon, but it makes sense in the US" because it comes after a public holiday - a bit like Boxing Day. Whereas in the UK it's just another day. Black Friday falls on "the day of the last pay cheque before Christmas" so retailers are spotting an opportunity to get consumers to part with their hard earned cash, she adds.

     
  26.  
    06:04: Black Friday

    Shareholders among you may still recoil at the term "Black Friday" - the name given to the stock market crash of October 13, 1989. But fear not, in the shopping context, the name has no such negative connotations. It's called Black Friday because many shops make enough money to put them "in the black" for the year, apparently.

     
  27.  
    06:00: Black Friday
    Black Friday

    Police were called to a number of supermarkets across the UK last night, amid concern about the size of crowds waiting for the doors to open on what's become one of the busiest shopping days of the year. Increasing numbers of British retailers are adopting the American tradition of reducing some of their prices for Black Friday - the day after Thanksgiving. Some websites are already reported to be struggling to cope with demand.

     
  28.  
    06:00: Matthew West, Business Reporter

    As always, you can get in touch by emailing bizlivepage@bbc.co.uk or tweeting @BBCBusiness.

     
  29.  
    06:00: Joe Miller Business Reporter

    Good morning. In a long-awaited speech later, David Cameron will call for major changes to the benefits that can be claimed by European Union migrants. He'll say they should have to wait four years before they can claim in-work benefits such as tax credits, or be eligible for social housing. We'll bring you more on that, and the rest of the business news throughout the morning.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.