25th November 2013
When the developed world’s governments bailed out the banks, the reason was that these institutions provided the financial underpinning and even the bedrock of the economy. But recent revelations from RBS put this justification under strain writes John Lappin
They may have been gambling with other people’s money in global investment markets by investing and trading in markets and instruments, they didn’t really understand. But because we needed the other bread and butter things that banks did, it was necessary, if not quite to forgive them their sins, then to at least make sure they survived to lend again another day.
Some of the details of those bailouts remain controversial, and some commentators including Mindful Money’s own Shaun Richards are not convinced that, beyond guaranteeing depositors’ money, the bailouts were worth it.
Many accept that the idea of ‘too big to fail’ was a necessary evil embraced by policymakers in the eye of the financial crisis storm. But the recent reports about RBS will strain the credibility of the strategy even further in the eyes of the public and the business community.
Did we really save RBS because of the supposedly awful impact on the real economy only to find out that the bank was actually undermining decent businesses and thus the real economy?
That would be a very grim conclusion. The evidence compiled by government adviser Lawrence Tomlinson has been sent to both regulators, the Financial Conduct Authority and the Prudential Regulatory Authority as the BBC reports. It may be some time before we hear their verdict.
It is suggested that in some cases, loans were passed to the Global Restructuring Group (GRG) lending division, which specialises in riskier loans. But these loans were then deliberately ‘distressed’ and the assets picked up cheaply by another RBS division West Register.
We suspect the arguments are going to get very heated.
For example, those whose loans are deemed distressed will inevitably be distressed themselves in such situations. They will almost always feel that the bank’s behaviour has been unreasonable, but the fees paid to GRS in one case more than a quarter of the million pounds, sound staggeringly high and enough to undermine any business, so the charge may stick.
Of course, the bank, especially because of its lax lending policies in the boom, especially to property and property related firms, had to plot a course back to more responsible lending.
Managing that transition is obviously less difficult for new loans, but what policies should be applied to the existing loan book?
A financial crisis puts pressure on the bank to deliver results above all else – to make sure loans perform or to extract the best value for the bank and the shareholders.
But it is possible that the ‘cure’ may have proved just as short-termist and cavalier, as the overall business strategy in the first place.
The bank has now asked City law firm Clifford Chance to investigate. Yet another report will, eventually, be forthcoming.
Of course, it comes at time when a wider report into SME lending by Sir Andrew Large covered in detail in the Scotsman, says that some loans are not being offered to SMEs by RBS because credit officers are penalised if those loans eventually underperform. The bank is below the industry average.
One might understand if RBS said it was under so much pressure to deal with toxic loans, repay the taxpayer, return to the private sector, return to profit, lend to businesses and individuals, deal responsibly in investment markets and become a good corporate citizen that it inevitably will make mistakes in the journey back to normality.
Unfortunately, the image of RBS that springs to mind is of a gymnast on the beam, who lost his balance, keeps losing his balance as he tries to remount and start again. That may be the case. But it is no comfort to someone who believes they have lost their business as a result.
As it stands, if these accusations prove to be true, it will be worse than rigging markets.