Stephen Hester, chief executive of the Royal Bank of Scotland, has once again put the boot in to his predecessor Sir Fred Goodwin.
Hester, who became RBS chief executive in November 2009, at a time when the bloated banking group’s very survival was hanging in the balance, was yesterday being 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 £36.6 billion Emergency Liquidity Assistance loan from the Bank of England last October was a sign it was “over-borrowed,” Stephen 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… “
Stephen Hester insisted he wanted to avoid getting too personal but it was quite clear under whose regime the bank had become excessively borrowed. Asked about the differences in risk management today, compared to under Goodwin’s tenure, Stephen 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…, 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.”
Pressed to map out his vision for Royal Bank of Scotland, Stephen Hester said he was a pragmatist who believed that many problems at big corporations were due to “management by pie chart”. This consists in coming up with a chart that shows the kind of organisation you would like to end up with and then “reverse engineering” the firm to fit that shape.
Stephen Hester also reiterated his confidence that RBS includes plenty of very good businesses that are very profitable, or have the potential to be profitable. These include operations in areas like vanilla commercial and retail banking, and confirmed that RBS would continue to be a “universal” bank. It will do around 60% of its business in the UK and 40% overseas. Around two thirds will be in retail banking and one third in serving companies.
Based on his dealings with UK Financial Investments (UKFI), which manages the government’s holdings in failed banks, he said that he expected the body to behave like any other significant institutional investor.
In conclusion, Stephen Hester said that the biggest issues that must be addressed to ensure there is no 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, Stephen Hester said shareholders including directors, pensioners and staff ended up bearing the brunt of the losses.
Other interviewees included RBS chief economist Andrew MacLaughlin and Financial Times assistant editor and columnist Gillian Tett.
Tett told the MSPs that the myopia of bankers contributed to the crisis. She said most were stuck in “silos” — where for example their focus would be as narrow as the manufacture of collateralised debt obligations (CDOs) — and that the bankers in these silos would become so obsessed about making money within their silo that they lost sight of broader issues.
Or, as Gillian 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 failure to engage with wider society.
Tett called for a more open and public debate about what should happen next. The key decision politicians need to 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 probably 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.”
This blog post was published on 26 November 2009