RBS: The £55 Billion Question That Has No Answer

It was reported yesterday that the major banks in Britain will be ‘in the spotlight’ next week when they reveal their yearly figures. The article in the Guardian talks of the focus on HSBC, and the issue regarding an overhaul of their boardroom, and of Lloyds Banking Group, who are expected to show relatively positive results as it nears the end of its ties to the U.K. Government and the British Taxpayers. However, the focus for this post is in the Royal Bank of Scotland (hereafter RBS), and the rumour that it will post a loss of more than £6 billion, which would see it post a loss for the ninth year in a row, which is extraordinary. Whilst Lloyds were also assisted by the taxpayer, why is it that RBS continues to fall further and further into the red? This post will therefore look at this question, and it appears that a culture that is about, potentially, to see them punished for mis-selling in the lead-up to the Financial Crisis remains strong. There are a lot of allegations being aimed towards RBS and, admittedly, it is important to note that RBS denies all wrongdoing for the claims regarding employee mistreatment and SME-based fraud (how they will respond to the multi-billion dollar lawsuits coming its way in the U.S. is another matter) – whilst this is important to note, it is also important to discuss the allegations, mainly in order to paint a potential picture of this massive organisation that is seemingly only going one way and, potentially, taking a lot of taxpayer money with it.

There has been an abundance of analysis on RBS since it was first ‘bailed out’ by the British Government, so this post will focus on two issues in particular: the impending ‘hit’ that the bank will take when the U.S. Department of Justice (DoJ) seeks to quantify its punishment for selling toxic products in the lead-up to the Financial Crisis; and secondly, recent allegations regarding the internal culture of the bank which, if proven true, would show that RBS is, perhaps, beyond repair. The trajectory of the bank’s fortunes is nearing the point at which it can no longer be ignored – the question then is ‘what can be done with a failing bank as large as RBS?’ Usual practice dictates that the bank and its operations would be sold to the highest bidder, but the interwoven nature of modern banks means that it is deemed more appropriate to continue trying to save it, and with the post-Brexit pressures already starting to build, the U.K. Government is unlikely to want to break up a constituent component of its financial services armoury for parts.

Firstly, RBS is just moments away, relatively speaking, from taking a massive hit. This is not to say that the impending punishment by the DoJ is the only hit that the bank has, or will face because, as any glance at the business headlines will tell you, the penalties for appalling business practice just keep on coming for RBS. There are a number of fines that have been given to RBS, or are still pending, like the £1.3 billion fine for foreign exchange rigging, as well as the fraudulent practices involving consumer accounts and instruments – but it is the actions of the DoJ that should present the biggest worry to RBS. Recently, the DoJ has stepped up its litigation against criminal institutions, with a number of high-profile settlements (there is much less of an appetite for criminal convictions, as discussed in a previous post). The conclusion of the DoJ’s punishment of the rating industry occurred recently, as discussed previously, and in the banking sector Deutsche Bank and Credit Suisse settled for a combined $12.5 billion for fuelling the Financial Crisis. At the end of last year, Barclays, rather stunningly, refused to settle with the DoJ and, as such, consequently prompted a formal filing of a lawsuit from the DoJ alleging that the bank ‘repeatedly misrepresented the characteristics of the loans backing securities they sold to investors around the world’. For RBS, the damage that they will take is cause for speculation. The bank has been said to have put aside up to £6.7 billion for its impending punishment, but industry insiders suggest it could go as high as $12 billion, which would be an incredible indictment on its involvement in the scandal. The potential damage may be so large that it has scared off the Chancellor of the Exchequer from attempting to sell off any more shares, particularly as the last time this was attempted the taxpayer lost over £1 billion on a sale of just 5% of its holding in the bank.

So the bank is in jeopardy is being financially punished even further. This, quite rightly, is a worry – mainly because it decreases the chances of the taxpayer ever receiving any sort of return on its involuntary rescue of the criminal bank. However, rescuing a bank is not, initially, such a negative thing. Although it is extraordinarily distasteful to rescue private organisations that take huge risks for short-term rewards, in the conscious knowledge that their size means that they will be saved at the expense of the health of society, there may at least be some ‘profit’ for the societal resources (the loss in human life, as just one example, is certainly not worth it however, as discussed previously) – this is demonstrated by the Lloyds Banking Group which, although ‘bailed-out’ to the tune of £20.5 billion, is almost ready to be returned to the private sector in full. So, why is RBS performing so very poorly? It cannot be solely related to their performance before the Crisis, because other firms that were also implicated in the scandal are starting to turn the corner. Arguably, the answer lies in its conduct.

Recently, in Financial Regulation Matters, the issue of fraud against Small and Medium-sized Enterprises (SMEs) was reported after the case of a number of HBOS employees that were given multi-year custodial sentences for forcing business customers into positions were they were expected to fail, at which point the bank would pick up the pieces for below-value and consequently make a profit on their sale. Unfortunately, but as is usually the case with this often-parasitic sector, the fraudulent and despicable approach may not end with HBOS. It was reported this week that there are allegations that RBS is, ‘on a kind of industrial scale, falsifying the core files on SME customers, and the falsifications are allegedly enabling RBS to then win against these customers’. These claims have been in existence for well over a year, and have made the tabloid press on a number of occasions. In a move similar to HBOS, the ‘Global Restructuring Group’ – now defunct section of RBS – would drive firms to the wall and pick up the pieces – a process crudely nicknamed ‘Project Dash for Cash’; the bank denied this, but a series of investigative reports found complicity, and as such the bank has set aside £400 million to compensate customers affected by the despicable practice. To increase the hurtful damage caused, the FCA were passing the details of complainants, who had come forward in confidence, to the bank themselves, which further adds to the sentiment that finance is designed to act against the public, of which SMEs certainly count. Essentially, we have a case of a massive organisation that partook in a horrifically-impactful scandal, which only survived with the intervention of the taxpayer, and now continues to transgress by forcing SMEs (arguably the backbone of any economy) into failure and then falsifying the records to attempt to remove themselves from any punishment.

Ultimately, even though the allegations have been mostly denied, there is enough smoke here to suggest that a fire lays underneath. The allowance for £400 million to offset the compensation to be awarded to SMEs suggests a systemic fraud which could go onto effect other banking institutions if investigative reporting digs deep enough. The larger question at hand here is what can be done with regards to RBS? We have a bank which is losing money consistently, is dropping value so that the taxpayer’s stake cannot be sold – unless at an extraordinary loss – and who continue to transgress, essentially attacking the backbone of the British economy. The correct thing would be to let the firm die and remove it from our midst, as this once great institution has been infiltrated by the greedy and corrupt. However, this cannot be done. The need to recoup the money pumped into the bank is great, and the need to project a healthy financial sector post-Brexit is arguably greater still. The result is a miserable one; RBS will continue to be assisted by the Government so that it can recoup its investment - this is seen recently with the Government campaigning on behalf of the stricken bank to the European Union to disregard its state-aid infractions so that the need to sell branches, in a deal which may potentially represent an undervalued sale, is removed from the forthcoming plight of the bank. The U.K. Government has a £55 billion Albatross around its neck and there is no clear path as to how to remove it – RBS really is a shining example of what happens when you refuse to let an infected institution die and, unfortunately, it will be the British taxpayer who will pay the cost of that lesson.