“RBS was the poster child of excess in the banking industry”
November 26th, 2009
Stephen Hester, chief executive of the Royal Bank of Scotland, has once more put the boot in to his predecessor Sir Fred Goodwin.
Hester was yesterday grilled by the economy committee of the Scottish Parliament as part of its inquiry into the banking crisis.
In answer to a question from the Christopher Harvie MSP on whether the Edinburgh-based bank’s reliance on a previously undisclosed £36.6bn loan from the Bank of England last October was a sign it was “over-borrowed” (surely Harvie meant to say “reckless” or “out of control”?), Hester said: “RBS was the poster child of excess in the banking industry.”
He added: “That’s the pieces that we’re all having to pick up, and which I’m not in any way trying to dodge from; I live that every day. I’m simply trying to point out you can’t have a safer banking system in a vacuum… ”
Hester insisted he wanted to avoid getting too personal but it was quite clear under whose regime the bank had become excessive. Asked about the differences in risk management today, compared to under Goodwin’s tenure, Hester said: “I’d like to avoid personalising things, I wasn’t there in the past, so my observations have some limitations to them.
“But I think that the real issue around risk management, not just in RBS but in Scotland and the financial crisis around the world generally, was that what was missed was obvious to all, and that’s its tragedy. The failure of risk management was macro … as opposed to things that were hidden in drawers, not visible.
In conclusion Hester said that the biggest issues that must be addressed to ensure there is not a repeat of last year’s catastrophe include finding a better “resolution regime” for failed or failing banks — including whether, for example, the utility parts of a bank such as money transmission can be ring-fenced, with less socially useful bits being allowed to go to the wall.
He also said that the issue of “who bears losses, how and in what order” when a bank fails also needs to be re-examined. In the case of RBS, Hester said shareholders including directors, pensioners and staff ended up bearing the brunt of the losses.
Other interviewees included RBS chief economist Andrew MacLauglin and Financial Times assistant editor Gillian Tett.
Tett told the MSPs that one major contributor to the crisis was the myopia of bankers. She said most were stuck in “silos” — where for example their focus would be as narrow as the manufacture of CDOs) — and the bankers within these silos would become so obsessed about making money within the confines of their silo they lost sight of broader issues. Or as Tett put it, they “failed to ask the really obvious questions” – such as whether their activity and behaviour was ethical, sensible or sustainable. As part of this there was a manifest failure to engage with wider society.
Tett made a plea for a more open and public debate about what should happen next. The key decision politicians must make is whether we want to build a safer banking system for the long term or simply encourage banks to return to the private sector as quickly as possible (which can only be achieved if they go back to their old ways of taking outrageous risks.) She said a debate was needed about “how to steer a line between those two somewhat contradictory goals.”
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