The Royal Bank of Scotland announces a huge loss. It will now be dismantled.
AT ITS obligatory roasting by the Treasury Select Committee this week, Britain’s financial regulator was accused of “being responsible for supervising ten big banks and allowing five to collapse”. In response, the boss of the Financial Services Authority, Lord Turner, promised a “revolution” at his organisation.
That is not far off what is taking place north of the border, at Royal Bank of Scotland (RBS), the most spectacular of those failures. Two bail-outs have left RBS majority state-owned. On Thursday, amid furore over his discredited predecessor’s lavish and now taxpayer-funded pension, its new boss, Stephen Hester, provided details on plans to break up the group. He also described RBS’s probable use of the government’s asset-guarantee scheme, which will soon be rolled out to other banks as well. For good measure Mr Hester also announced the largest loss in British corporate history.
There is a lot to break up: acquisitive RBS was the world’s largest bank by assets in 2008. Its purchase of bits of ABN AMRO, a Dutch bank, in 2007 brought the kind of geographic spread (try 20 branches in Indonesia) that looks sage at the pinnacle of a bull market and more like imperial overstretch at any other time. Mr Hester plans to split the bank into two parts: the good and the mediocre.
Into the good pot will go about three-quarters of the bank’s existing activities, consisting mainly of its British and American banking operations, its insurance division and the less-dangerous bits of its investment bank, which is to be halved in size. Some tasty overseas businesses, for example in India, will be retained. The mediocre pot will contain the other foreign retail assets, which RBS will attempt to auction. But it will consist overwhelmingly of the dodgy bits of the investment bank (such as its leveraged-loan and property activities), which will probably be wound up over several years.
To bolster capital and prod the bank into lending more, the government will guarantee assets on RBS’s books with a value of £302 billion ($430 billion)—equivalent to about a quarter of its total risk-weighted balance-sheet. RBS will be responsible for the first £19.5 billion of any losses, and the state for most of the rest. By limiting its risk (for a fee of £6.5 billion to the Treasury), RBS will boost its core capital ratio from 7% to 9%. It also promises to lend £50 billion more in the next two years, expanding its domestic loan book by a fifth.
That punchy rate of growth helps explain the biggest surprise. The Treasury is investing a further £13 billion which, like the guarantee fee, will take the form of a new kind of preference stock that can be converted to ordinary shares. This stock will bolster capital more securely than the suspect hybrid stuff that American regulators are keen to inject into banks, since its dividends can be cancelled. The result will be that RBS’s core capital ratio hits a whopping 12.4%, about double the level at JPMorgan Chase, America’s soundest big bank.
All of which may seem overgenerous, particularly since the state’s voting rights will be capped at 75% of the total—less than its likely financial stake in the business. But the advantages to taxpayers of having a bank that is well-capitalised enough to lend, but also well-run enough to be sold back to private investors one day, should not be underestimated.
0 comments:
Post a Comment