Banking on more capital

I see The Financial Policy Committee has decided that the main UK banks need a bit more capital before they are as safe as the new authorities wish. Predictably, RBS seems to be the one in need of most new capital, and that is the one large bank that is still not making a profit. With a main shareholder, the UK government, rightly unwilling to subscribe more money, and no retained profits to fatten the assets on the balance sheet, RBS remains the most difficult of the banks to reform.

The Regulators and the shareholders of RBS need to look for other solutions. The government is right not to put more capital into RBS. It should not have put so much in as new equity at the beginning. What it needs to do now is what it should have done in 2008 when the crisis first erupted – sell off assets and slim the bank down by disposals. RBS was never a natural integrated successful group. It should sell its American bank, Citizens, sell the parts of its Investment Bank that are profitable and free standing, and create new clearing banks in the UK market out of the assortment of branches, assets and liabilities it currently enjoys. The taxpayer deserves to get some money back from the disposals of the good bits. Taxpayers in the UK also need more competitive properly financed banks on the High Street.

Taxpayers may have to remain as the owners of a bad bank that could remain once the rest is sold on. As we already own a large majority share of the bad bits of the RBS Group, that is no new hazard. The prize would be the creation of more competition in UK domestic banking, and a resolution of the problem that banking in the UK still is not backed by enough capital to allow sensible expansion of overall loan books. The UK recovery has been held back by the inability of the UK clearing banks as a whole to expand their loans to new people wanting to buy homes, set up businesses or expand decent small and medium sized enterprises. The Bank’s monetary experimentation has not had enough impact on the real economy owing to the Regulator’s insistence on more cash and capital to be held in the banking system, and owing to the weakness of some of the banks in the system.

Sorting out RBS would be the single most important contribution the UK government could now make to overall economic recovery. The fact the RBS remains the worst placed of all the UK banks on capital, more than four years after the crash, argues for new measures to tackle the problem of too little capital and too little competition in UK High Street banking.

When I visited Scotland earlier this week I was interested to see RBS can still afford a lot of advertising at Edinburgh airport. The advert I most enjoyed was the one on a walkway which announced “In 2011 RBS delivered Moneysense to 67,000 young people in Scottish schools.” I do hope it was a case of do as I say, not as I do. We would not want young people brought up to believe you go out and borrow and spend on a massive scale, then ask the taxpayers to stand behind the bills whilst you carry on losing money.

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48 Comments

  1. Leslie Singleton
    Posted March 29, 2013 at 6:18 am | Permalink

    I have never been comfortable with this good/bad bank split, or indeed much else that passes for our approach to problem banks.. First, it is far from clear to me why the bad bank should be left in the hands of the Government. What do they know about recovering the maximum on non-performing loans–which is a very skilled task requiring great experience–not much I venture. Secondly, it is all very well dreaming of returning the good bits to the private sector but there is the obvious danger, especially in this economy, and if it is done in a hurry, of getting a very poor return. I don’t even begin to buy the idea that we should make what might smack of fire sales on basis that the Taxpayer “deserves” some money back–these matters are too important to be based on sentimentality.

    Reply Five years on these are not fire sales. Wall Street has just hit a new high, and US banks are largely mended – probably a good time to sell Citizens.

    • zorro
      Posted March 29, 2013 at 5:32 pm | Permalink

      Reply to reply – Indeed, take advantage of the pumped up stock market on the back of QE, and sell off what we can before another crash…..

      zorro

    • Leslie Singleton
      Posted March 30, 2013 at 3:59 pm | Permalink

      Comment on Reply–I agree that it might be a good time to sell Citizens but you wrote expansively I think

  2. Gary
    Posted March 29, 2013 at 7:26 am | Permalink

    The problem is far bigger than RBS.

    The problem is taxpayer underwriting of fractional reserve banks’ risk, causing unacceptable risk taking that led to reckless lending and poor quality loan books. The damage has been done, it is systemic and apparently huge. Now they want over £180 bn new taxpayer money. When will this end?

    Competition won’t resolve a system with a flawed premise. We need to clean out these banks , withdraw all govt underwriting and let the banks stand or fall on their own, before they drag the country, if not the world, even further down the black hole.

    • uanime5
      Posted March 29, 2013 at 1:41 pm | Permalink

      Alternatively the Government could create credit limits based on the assets the bank holds, for example they can’t lend more than 5 times the amount of capital they hold. This would make reckless lending much less likely.

      • Mark
        Posted March 29, 2013 at 4:42 pm | Permalink

        That would lead to an implosion of lending: banks would have to foreclose on most mortgages and business loans in order to reduce their loans to your target.

    • zorro
      Posted March 29, 2013 at 5:29 pm | Permalink

      They create money out of nothing…….and we have to pay them with the fruits of our labour to cover their irresponsible binges….

      zorro

  3. lifelogic
    Posted March 29, 2013 at 7:58 am | Permalink

    Indeed, RBS methods so far have been to demand cash back or (impose charges that customers think are high-ed) even their good customers and make life as difficult (words left out-ed) for them, in any ways they can. This has had the consequences that we can all see, the lack of growth, delayed projects and the like. The government shooting itself in the foot as is usual with Cameron and the wrong on almost everything satirically named Libdems.

    How on earth is RBS’s Natwest is allowed to advertise as “Helpful Banking” by the ASA (How true is that? ed)

    The difference between what banks pay depositors and what they charge borrowers shows a huge lack of competition in the market. Cut out the middle men they are ripping us all off.

    • lifelogic
      Posted March 29, 2013 at 3:59 pm | Permalink

      I was being very moderate, I think, given what I know to be true with RBS/Natwest. The other banks were not exactly helpful, but RBS Natwest has behaved appallingly to good solid customers in my experience.

      Cut out the high margin middle man and get some real competition going in banking please.

    • zorro
      Posted March 29, 2013 at 5:36 pm | Permalink

      Indeed, you couldn’t make it up…..In their global charter on the website, ‘Britain’s most helpful bank’ (sic)…….and we’ll spotted John, RBS….Moneysense!?!…..IRONY KLAXON

      zorro

      • Bazman
        Posted March 31, 2013 at 6:25 pm | Permalink

        Ever wondered where you’re money goes? Asks taxpayer owned Lloyds TSB. etc

  4. alan jutson
    Posted March 29, 2013 at 8:44 am | Permalink

    Yes, a higher reserve will mean less loans made and more clawback from existing businesses on loans/facilities they already have.

    Clearly Banks need to be safe and be able to withstand a few knocks, but surely this is down to the quality of the loans and investmenmts made in the first place, they have had afterall 5 years to tackle this problem.

    I wonder, has the instruction been given because the BOE/Government is frightened/concerned that the Banking industry as a whole may have to stand the strain of a run on the Banks, when others (Banks elsewhere) start to fail and confidence drains away from the whole system as people withdraw some deposits.

    One thing for sure, the instruction to increase reserves will not help business or the quest for growth.

    • zorro
      Posted March 29, 2013 at 5:38 pm | Permalink

      It is frankly perverse, notwithstanding any other Basle III requirements. It must be clear to anyone that there is no intention of creating the circumstances for economic recovery. In fact, everything to stop or finally collapse the economy is being put in place….

      zorro

      • zorro
        Posted March 29, 2013 at 7:00 pm | Permalink

        Thinking laterally, I wonder if this might be a reaction to some of the budget proposals on housing and deter the banks from thinking about creating too much credit/lending too much money…..

        zorro

        • alan jutson
          Posted March 30, 2013 at 10:16 am | Permalink

          Zorro

          One thing is certain, they are worried/concerned about something, which has perhaps yet to come to light.

    • sm
      Posted April 3, 2013 at 6:18 pm | Permalink

      Increasing capital reserves for the at risks banks might be useful to mitigate the effects of QE & large money printing to come.

      Lets hope regulators are actively encouraging new entrants and competitors.

      The old banks can then write off bad debt and compete or be replaced.

      A bit of QE direct to the public to pay down dent might help also.

  5. Ralph Musgrave
    Posted March 29, 2013 at 9:07 am | Permalink

    JR trots out the conventional wisdom, namely that “The UK recovery has been held back by the inability of the UK clearing banks as a whole to expand their loans to new people wanting to buy homes, set up businesses…”

    So the solution is to return to the excessive levels of lending that caused the problem in the first place? Banks have expanded by a whapping TEN TIMES (relative to GDP) over the last thirty years. See p.3 of a speech by Mervyn King here:

    http://www.bankofengland.co.uk/publications/Documents/speeches/2010/speech455.pdf

    I suggest that assuming there is room for stimulus, then those boring British households should be given extra spending power (and/or public spending expanded, depending on your political preference). And that increased economic activity will bring about extra lending where appropriate.

    But of course the Westminster elite doesn’t want to see the rif-raf living on council estates in Northumberland given more money. The elite throughout history has preferred spending money on projects that bring them prestige. And the political elite won’t say no to the party political donations it gets from bankers in exchange for boosting the banking industry.

    Reply: No, I do nto ant to see excessive credit again, soemthign I opposed last time b efore the crisis. I do wish to see a new generation able to buy a home on mortgage and set up a business with borrowings for workign capital etc. I also want to see more demand from people on all income levels, and support income tax cuts for the low paid by raising the tax threshold, something the government is doing.

    • ian wragg
      Posted March 29, 2013 at 2:57 pm | Permalink

      Increasing the tax threshold is a Libdum policy and the 40% rate as been lowered to compensate.
      Now we have beings like me on modest incomes paying 40% tax.
      The only good thing is I’m over 65 and don’t pay N.I.

  6. Mike Stallard
    Posted March 29, 2013 at 9:14 am | Permalink

    “The UK recovery has been held back by the inability of the UK clearing banks as a whole to expand their loans to new people wanting to buy homes, set up businesses or expand decent small and medium sized enterprises. ”

    Size.
    If you want to make a lot of money in a huge organisation and feel very important, then it is important to work in a very large organisation. If you are going to be aBig Man/Woman then it is important to have a lot of people under you.
    If, on the other hand, you want to serve to local community, you have to live there with your family, to join the local clubs, to go to the local cricket team and let your kiddies go to school with other normal local people.

    One of the saddest thing on TV recently was the FSA stamping out the Bank of Dave. He knew the local people: he really cared. He lived there. I did not see anyone from any Megabank in the film and I hardly ever see them here in my little town either.
    So they must be just guessing.
    And when you are out of touch, it far safer to say “No” than “Well……”

    • Nicol Sinclair
      Posted March 29, 2013 at 1:58 pm | Permalink

      @Mike Stallard: Perhaps I’m to fu’ of Falling Down Water’ but I didn’t understand where you are coming from…

      What is “the Bank of Dave”? Did I miss something?

  7. Brian Tomkinson
    Posted March 29, 2013 at 9:20 am | Permalink

    Surely we are always being told what a wonderful job Stephen Hester is doing at RBS? So wonderful it is unprofitable and needs more capital than any other UK bank. Just how much more capital does RBS need? If Citizens is sold will that be enough to bring the capital held to the new required level? How would that be giving the taxpayer some money back from the disposals of the good bits?

  8. A different Simon
    Posted March 29, 2013 at 9:58 am | Permalink

    There are some remarkable parallels between Scottish Business and Scottish Football .

    – Previously Scotland had two companies of International note ; RBS and Weir Pumps .
    – Previously Scottish football was a two horse race .

    Now they have shot one of the horses and RBS has been uncovered as a massive (set of problems-ed) .

    I like the Scots but fear for them .

    With only one company of note now how the heck do Alex Salmond and Sean Connery think an independent Scotland can survive ?

    • Nicol Sinclair
      Posted March 29, 2013 at 2:00 pm | Permalink

      @A different Simon: “I like the Scots but fear for them .” As a Scot, I am also fearful.

  9. Vanessa
    Posted March 29, 2013 at 10:48 am | Permalink

    I read today that the EU wants to increase its budget by euros 11 billion (more than the whole bailout to Cyprus) !! What is this “club” thinking? Cameron will be unable to veto it as it will be waved through on QMV and we will HAVE to pay another £1 + BILLION to these criminals.
    When this country’s finances collapse (as they will at this rate) and we are declared bankrupt what will this government do / say about the responsibilities it was given by the electorate to run and look after Britain ?
    Our energy will run out and no-one except Russian oligarches, Bankers and Politicians will be able to heat their homes but there will be NO shops, manufacturing or farming for these nincompoooops to live on. WELL DONE!!!!!

  10. A different Simon
    Posted March 29, 2013 at 11:05 am | Permalink

    Let’s just close the bank down to destroy the debt and bail out the deposit holders . Now .

    A loss of a couple of hundred billion now is better than a loss of a trillion when they are forced to come clean about all the fantastic business they have done over the past decade .

    Too many losses have been socialised already .

    Write it off and start again with a clean sheet .

    • zorro
      Posted March 29, 2013 at 5:42 pm | Permalink

      We need to see and consider a serious proposal on that basis now. It is difficult to know if they have really come clean.

      zorro

      • sm
        Posted April 3, 2013 at 6:30 pm | Permalink

        A realistic stress test perhaps.

  11. behindthefrogs
    Posted March 29, 2013 at 11:48 am | Permalink

    In the current economic situation the last thing that British Companies should be doing is selling profitable foriegn assets. If Citizens Bank is profitable then RBS should retain it. We need income from foriegn assets to be brought back to the UK.

    What RBS should be doing is closing down and selling off unprofitable assets.

    • zorro
      Posted March 29, 2013 at 5:43 pm | Permalink

      We just need to find someone to buy the unprofitable loss making ‘assets’……

      zorro

      • zorro
        Posted March 29, 2013 at 7:02 pm | Permalink

        Where is Gordon when we need him?

        zorro

  12. uanime5
    Posted March 29, 2013 at 1:51 pm | Permalink

    Given that it was possible to split Northern Rock into assets and banking, and sell the latter part it’s likely that splitting up RBS will allow the Government to sell the good parts.

    In other news the Universal Credit may not be ready because the IT system isn’t working. I expect that it will not be ready before the 2015 election.
    http://www.independent.co.uk/news/uk/politics/not-so-universal-credit-government-puts-the-brakes-on-trials-of-its-controversial-new-benefits-programme-8554053.html

    • Denis Cooper
      Posted March 29, 2013 at 4:01 pm | Permalink

      And what is the latest estimate for taxpayers’ losses on Northern Rock?

      Still only £2 billion?

      http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/552/55206.htm

      “the economic loss to the taxpayer of the intervention is currently estimated by the NAO to be £2 billion.”

      • uanime5
        Posted March 30, 2013 at 1:02 pm | Permalink

        I never claimed that it was profitable just that it was possible to sell it.

        Also the £2 billion loss is only the loss from selling the good part of Northern Rock. According to the link you posted the UK still has £38.9 billion of mortgage and other lending assets from the bad part, which could lead to further losses.

        • Denis Cooper
          Posted March 30, 2013 at 4:34 pm | Permalink

          Thanks for that heart-warming information.

    • zorro
      Posted March 29, 2013 at 5:45 pm | Permalink

      Why does that not surprise us!?…..IT…….the government’s bête noire…..

      zorro

  13. David Saunders
    Posted March 29, 2013 at 1:54 pm | Permalink

    I agree about the odd priorites of some in the C of E when speaking at a special occasion and heard by many more than usual. I recall attending a Christmas service in the North of England when the then Bishop of Bradford used his sermon to a packed parish church to advance his left/liberal theories about banning the nuclear bomb. I asked him afterwards if he regarded this as a wasted opportunity to advococate the Christian faith and he looked puzzled at the suggestion!

  14. Nicol Sinclair
    Posted March 29, 2013 at 2:10 pm | Permalink

    @JR: I have been a depositor/account holder in RBS since 1963. Those were the days when a) I had a manager in Edinburgh who I knew, b) the Royal Bank of Scotland (as it was then known) did not have a ‘casino’ arm. All was well in the world. Since then, the buggers expanded into gambling and that is the situation that I now find myself in. They bought ABN Amro – a disaster, they entered into the casino – another disaster, lost a lot of money including mine and I’m now left wondering what I should have done as a 21-year old. Nat West? Belongs to RBS, Midland? Belongs to Nat West, Barclays? Also in bovver. Lloyds? Amalgamated with TSB – also a disaster. Better to bank under the mattress or a Cypriot/Icelandic Bank?

    • Sean O'Hare
      Posted March 29, 2013 at 3:54 pm | Permalink

      Nicol,

      Midland does not exist and when it did it has never, to my knowledge, belonged to Nat West. Midland became HSBC which seems for be fairing a lot better than any of the others you mention.

  15. ian wragg
    Posted March 29, 2013 at 3:05 pm | Permalink

    You want to know why there is no growth.
    My wifes shop has just had the bill for refuse disposal. Up from £430 to £507.
    Her gas and electric have gone up by 22% for almost identical useage. The business rates are expected to rise and her landlord is asking for a 10% rise although several of his shops are vacant. Turnover is down 4% on last year.
    Who can afford to employ people when nearly all the cost increases are government inspired.

    • Brian Tomkinson
      Posted March 29, 2013 at 6:29 pm | Permalink

      Ian,
      Good points but our politicians are all spending junkies who think they can use your money and your wife’s better than you can.

      • uanime5
        Posted March 30, 2013 at 1:05 pm | Permalink

        How exactly is it the state’s fault that private companies charge more for refuse disposal, private landlords want more rent, and private gas and electric companies keep increasing their prices regardless of what’s happening in the economy?

        Not every increase in business costs is the fault of politicians.

  16. Denis Cooper
    Posted March 29, 2013 at 4:24 pm | Permalink

    Surely events in Cyprus should be enough to convince even the most hardline advocates of free markets that the government could not have allowed RBS to suddenly close down?

    But the question is, what should have happened after the emergency action to prevent a collapse of the financial system and economic meltdown?

    It’s one thing for the Bank of England to provide emergency loans when a systemically significant bank is faced with a temporary liquidity crisis mainly due to events beyond its own control, but if it gets to the point of a bank having to be partly or wholly nationalised then in my view that should be its death warrant, even if execution is delayed.

    How can it be right that there is still a bank trading under the name “Northern Rock”, almost as if nothing had happened? It should have been consigned to history, like so many other failed companies.

    However that is not the view taken by the government, which apparently believes that in the future there should still be a private bank, or banking group, called “RBS”, which can then more or less carry on as if it had never at any time been a failed company which had to be rescued by taxpayers because it was considered too large to fail.

  17. Rods
    Posted March 29, 2013 at 5:08 pm | Permalink

    If you want more banking competition with lower barriers of entry, then surely a good use of the RBS branch network would be to allow Internet banks and new entrants to use them for their services in much the same way as parts of BT exchanges are used by other telephone and broadband suppliers. They would then have a high street presence without the cost associated with setting this up for their sole use. This is not exactly a unique phenomena on the high street where many multiples having third party in-store specialist kiosks.

    RBS would gain from the extra revenue associated with this. This could be as little as a paying in machine to a dedicated counter slot and office / shared office to see customers.

    Everybody would gain from this:

    1. Businesses and consumers would have more high street banking competition.

    2. The lower barriers and cost of entry would encourage the setting up or the entry of more banks into the UK.

    3. More banks spreads the Governments risk and the too big to fail problem.

    4. RBS would make more money per branch from the rental income from the banks they share the premises with.

    What is there not to like about this solution?

  18. Richard1
    Posted March 29, 2013 at 5:57 pm | Permalink

    The debate on bank resolution regimes has really moved on in recent months. Its becoming accepted that the Gordon Brown taxpayer bailout mechanism is a terrible mistake, as you – almost alone at least among MPs – pointed out at the time. We need proper capitalism in banking, with shareholders and creditors liable for losses as they are in other sectors. All these attempts to regulate banks to safety, and at the same time to ensure a working credit market are a waste of time (and money).

  19. zorro
    Posted March 29, 2013 at 7:09 pm | Permalink

    Talking about new banks, has anyone heard of Metro Bank? I see that a branch is opening in Slough. Apparently it will be opening seven days a week….https://www.metrobankonline.co.uk/Commercial/

    I wonder what impact this institution, and perhaps others like it will have on the High St and Business banking?

    zorro

  20. Mark
    Posted March 30, 2013 at 10:27 pm | Permalink

    Trying to pump a share of another £130bn of mortgage lending at bubble house prices onto RBS isn’t going to help them sort out their balance sheet.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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