Should RBS Be Broken Up?

Published in Investing on 13 March 2012

Vince Cable's plan for a British Business Bank is worth serious consideration.

Should RBS (LSE: RBS) be broken up? Vince Cable's now infamous leaked letter to his bosses floated this suggestion, which was summarily rubbished by politicians, bankers and pundits. Well they would, wouldn't they?

But among a number of industrial policy proposals contained in Mr Cable's five-page letter, the half-paragraph devoted to RBS merits much more detailed analysis. He said:

"My suggestion is that we recognise that RBS will not return to the market in its current shape and use its time as a ward of state to carve out of it a British Business Bank with a clean balance sheet and a mandate to expand lending rapidly to sound business. We should be willing to use such an institution to support our industrial objectives, such as supporting exports and sectors identified as of strategic importance."

There are three elements:

1. In the opinion of the Business Secretary, RBS isn't fit for privatisation.

2. A 'clean' business bank should be split out.

3. As well as promoting lending to small and medium enterprises (SMEs), it should be used to support industrial policy.


The first element got short shrift from David Cameron, who gave parliament the Coalition line: "RBS has to return to health, it's got to deal with its bad loans, it's got to grow the rest of its business so that we can return to people the money that they put into that bank."

That resembles the Canute government's policy towards coastal erosion. The fact is that markets and economics will determine how much of the £45bn poured into RBS by taxpayers will be returned. It's currently valued at half that, though a few years of restructuring may obfuscate the figures sufficiently for political purposes.

I'm with Mr Cable, though, in perceiving a poor short-term prognosis. Banks still aren't trusted by investors because they haven't yet come clean on the true value of their assets. For example, both RBS and Lloyds (LSE: LLOY) have billions of distressed property loans being nursed in banking hospital wards because selling them would trash values further. RBS wouldn't trade at just 20% of its book value if the market has faith in its balance sheet.


The banking sector is vulnerable to whatever debacle could emerge from the eurozone. And the global industry is on probation after the financial crisis of 2008-9. Returns on equity are bound to decline as regulators require greater capital support and clamp down on risk and -- hence -- innovation.

So why would investors pay top dollar for a second-hand bank with a not-very-careful previous driver? New capital is more likely to flow into the industry through good banks such as HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) getting stronger, or new entrants with new ideas and a clean sheet such as Tesco (LSE: TSCO) and Virgin.


An alternative strategy for RBS at least merits serious examination. Splitting a problem bank into a 'good' bank that conducts business as usual and a 'bad' bank that works out bad loans is a tried-and-tested strategy worldwide.

Mr Cable is silent on what gets left behind after the Business Bank is carved out. Presumably, there would be a retail bank with a high-street network that could easily be transferred into the private sector and arguably offers the best prospect for a financial return to existing investors.

Retained under state ownership would be a work-out unit like Ireland's National Asset Management Agency (which is actually the third largest lender to the UK property sector after RBS and Lloyds).

Development bank

The British Business Bank would effectively be a development bank for the UK. Now, development banks generally have a bad reputation, associated with state-directed lending in communist nations and rampant corruption in developing ones.

But you don't need to look far to find a development bank that has participated in the creation of a vibrant economy.

Germany's KfW has a balance sheet of €440bn, roughly 80% of RBS's customer lending book. Wholly publically owned (80% by the state and 20% by regional government), the bank proclaims on its English-language website: "We promote Germany. We finance the investments in the future made by German citizens and SMEs to ensure that the German economy remains strong, as well [as] investments in municipal and social infrastructure to advance structural change and the common welfare." None of your "we're Europeans first" there, then.

The bank -- its full name translates as Bank for Reconstruction -- was established by the allied powers in 1948 to channel Marshall Plan aid into Germany. But since the end of the 1950s it has had a major focus on financing SMEs, which are the backbone of present-day Germany's economic success. That, and an artificially low exchange rate courtesy of the euro.

Low-cost loans

KfW's bonds are guaranteed by the state so its borrowing costs are low. It doesn't pay tax and it doesn't have dividend-hungry outside shareholders. So it can provide low-cost loans that are generally channelled through commercial banks.

It would be facile to ascribe Germany' success to it having a development bank. But it would be equally flippant to ignore the role it has played.

Some might fear a British Business Bank could be the slippery slope to a command economy. But the government's insipid attempts at influencing executive remuneration and appetite for business lending at the state-owned banks should give the lie to any notion that a properly structured development bank would be just an arm of government.

And much of Mr Cable's letter was aimed at promoting those sectors of the economy that Britain is good at, such as aerospace, digital and creative industries, and business services. Better funding for those sectors could generate rich rewards for UK company shareholders.

We might, perhaps, all be better off if the Business Secretary is allowed to think the unthinkable.

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buywhenhigh 13 Mar 2012 , 3:28pm

I think Vince Cable should be broken up!!

snoekie 13 Mar 2012 , 7:09pm

Vince is a twat, and what he knows about banking and the business could probably be written on the sharp end of a pin.

ANuvver 13 Mar 2012 , 11:34pm

Does any politician know anything (beyond the briefing) about finance or economics? They mostly just lip-synch - with reference to the aspiring politician's equivalent of a media studies degree, they all seem to emerge with far too much PP and not enough E.

For all his post-neo-endogenous posturing, Brown was a social historian.

Vince is a misrule fool. Think the unthinkable indeed. The unthinkable should only be thunk for satirical and cathartic purposes. So maybe his is a useful role after all, nuncle.

TimberMadam 13 Mar 2012 , 11:58pm

I'm no Liberal but I fear that some posters here do Vince a disservice. He was Chief Econmist at Shell immediately prior to becoming an MP. If we think he knows nothing about finance then who do we want to be our MPs?

Luniversal 16 Mar 2012 , 7:35pm

Only a stockmarket-besotted culture such as ours would dream of trying to refloat RBS at a capital profit for the taxpayer. The Treasury is wallowing in folk memories of the 1980s.

RBS should be nationalised and mutualised, with the bad bits split off, the casino closed down and the rest tasked with behaving pro-socially for the good of the nation, not to generate commissions for investment banksters, brokers, corporate lawyers, financial PR engineers and the rest of the grisly 'tell Sid' crew which eviscerated the economy in the 1980s.

Every taxpayer should have a certificate of ownership, which can be gifted or bequeathed but not, repeat not, made the object of secondary speculation on any stock market. Profits can be distributed annually as a People's Dividend. Voting on line would revitalise shareholder democracy and participation by shaming our closed corporations-- rackets run by fat cats with the collaboration of institutional investors.

RBS should become a retail bank for small savers and borrowers (perhaps formally forbidden to dabble in property market loans until it has purged its contempt) and a financier of SMEs, as ICFC used to be. Its senior staff should be paid on the scale of civil servants.

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