Scotland’s banks: UKFI’s dangerous balancing act
What a disgrace and a laughing stock Scotland’s banks have become. Having had the pleasure, or otherwise, of reporting on HBOS and the Royal Bank of Scotland for most of the past decade, I can honestly say I never knew it would end like this. And, arguably, it didn’t have to.
Scotland’s erstwhile financial titans have hardly covered themselves with glory. Both have destroyed themselves, ending up on adjacent life-support machines in a government-sponsored intensive care ward.
In no other country have so many banks been nationalised. Most have just been given a comparatively small amount of taxpayer support.
So what went wrong in the UK? Why were our banks, and Scotland’s banks in particular among the least responsible in the world? It’s a question to which we need answers and, given its performance to date, the Treasury select committee is not going to get to the truth.
Did Scotland’s banks pursue suicidal strategies because the regulator was asleep at the wheel? And what about the government’s role? Did it egg them on and, through its apparent faith in unfettered capital markets, precipitate the crisis? For the increasingly beleaguered denizens of Downing Street, the answers are yes and yes.
Late on Friday, Lloyds Banking Group became the latest patient in the intensive care ward, alongside Bradford & Bingley, Northern Rock and RBS, as the state took a majority stake. It is worth looking into the prescription the bank, which suffered toxic shock after acquiring HBOS in January, will be receiving from their doctor, John Kingman of UKFI, the vehicle the government set up to manage its bank shareholdings.
Kingman, 39, has a particular treatment schedule in mind. However, he needs to watch out. I suspect the European Commission might intervene to ensure the Treasury’s formula does not distort competition or harm British consumers.
Another issue is that UKFI is an organisation without precedent anywhere in the world. It was originally intended as a sort of buffer zone between the government and the banks, but it has ended up having a monopoly of UK banking. Its position is even more dominant in Scotland.
UKFI has a difficult balancing act to perform. It is supposed to operate at arm’s length to focus on creating value for the taxpayer-as-shareholder. It is also meant to act as an exemplary institutional investor — “Fidelity with nukes”, as City wags would have it — while respecting the rights of smaller shareholders. It’s a tall order, especially when politicians with little or no understanding of banking keep chipping in with other unrealistic suggestions for the banks.
Given Kingman’s performance in the select committee last week, UKFI seems confident that it will be able to return its four very sick patients to the private sector full of vim and vigour within a few years, with at least some of their limbs still attached.
I’m not so sure. If Scotland’s banks do re-emerge into the private sector, they are likely to be unrecognisable from what went before, which some would say will probably be no bad thing.
Royal Bank of Scotland, for example, is likely to be shorn of bling like Coutts and Adam & Company, the private banks, retaining a UK branch network and little else.
Realism is required. The chances of HBOS and RBS returning to their old swaggering ways, as separately listed banks with their headquarters in Edinburgh, are virtually zero. It is for this — not just the bankers’ egregious compensation packages — that those who drove them into the ground ought to be being pilloried.
It pays to have ethics
Not all banks are doing badly. Tesco Personal Finance last week announced the creation of 200 jobs at its Edinburgh headquarters, while Triodos, a Netherlands-based ethical bank, said it boosted its lending in Scotland by 31% to £23.4m last year.
It claims to have been mopping up business from social enterprises keen to distance themselves from the likes of HBOS and RBS. The bank, which chose Edinburgh as the base for its second UK branch — the first is in Bristol — said its Scottish loan book already makes up 11.4% of its UK-wide lending. So it is already punching above its weight north of the border.
On the waterfront
Alex Salmond’s minority government may have screwed up with its alcohol proposals last week, but it timed its announcement about regenerating Dundee’s waterfront with aplomb.
It said it would invest £33m in regenerating the area, reconnecting the city of jam, jute and journalism with the river Tay. The funding will go towards a massive storm-water tank, a new northern boulevard and the demolition and rebuilding of the exit and access ramps for the Tay Road Bridge.
Ministers hope it will kick-start private-sector development and bring a further £270m to the neighbourhood, creating a thriving new business district.
It’s Keynesianism in action. And one in the eye for Labour on the eve of its Scottish conference in the city.
This article on Scotland’s banks was the Scottish Agenda column in The Sunday Times business section on 8 March 2009. Read it on Times Online