Don't panic. The message from City watchdogs to customers of Royal Bank of Scotland, which will ask its shareholders to stump up £10bn of new capital for the bank next week, could not have been clearer yesterday. While RBS's rights issue will be the largest ever fund-raising effort of this type by a British company, there is absolutely no suggestion that customers' money is at risk.
"This is not a matter that should concern savers and borrowers," said a spokesperson for the Financial Services Authority, the regulator responsible for keeping an eye on banks. "We are in daily contact with all the high street banks, and we will continue to be so."
A rights issue is an appeal by a company to its existing shareholders to buy more shares, newly created for the purpose. In RBS's case, the money will be used to shore up its balance sheet, which has been damaged by investments related to the collapse of the sub-prime mortgage market in the US.
In that, of course, there are echoes of Northern Rock. However, RBS's plight is very different to the crisis that forced the Newcastle-based lender to go cap-in-hand to the Bank of England last August and subsequently led to its nationalisation. Unlike Northern Rock, RBS is not short of the funds it needs to conduct day-to-day business, and could carry on as normal even without this rights issue.
However, Britain's biggest banks have come under increasing pressure to strengthen their balance sheets, particularly since a similar round of fundraisings conducted by American investment banks in recent months.
All the leading banks comfortably pass the financial strength tests set by regulators such as the Bank of England and the FSA. But these tests set bare minimums, and in an environment as testing as the current financial crisis there has been a growing clamour for the banks to plump up their capital cushions. City regulators have dropped heavy hints that they believe rights issues are necessary.
The Bank and the FSA were at pains yesterday to insist they had not ordered any bank to raise capital. But crucially, the banking sector is in the midst of difficult negotiations with the Treasury. RBS's chief executive, Sir Fred Goodwin, and his counterparts in the City this week asked the authorities to let them borrow billions of pounds; in return they would hand over mortgages and other assets as security.
The theory is that extra money from the Bank of England – possibly as much as £100bn – would unblock a logjam in the credit markets, enable banks to begin lending to each other again, and put an end to the problems that have seen many lenders withdraw mortgage products or raise their interest rates.
The Treasury is broadly supportive of the idea, but ministers are also desperate to avoid being seen to be bailing out banks with taxpayers' money. At the very least, they now expect the banks' shareholders to do their bit, and it is in this context that RBS now feels compelled to stage a rights issue, despite repeatedly insisting in recent months that there was no need for it to do so.
The drama of Britain's second-biggest bank asking its shareholders for such huge sums naturally prompted a storm yesterday. But it is likely to be the first of many. RBS spent the best part of £10bn acquiring the Dutch investment bank ABN Amro last year, and has therefore found itself shorter of capital than its rivals. Even so, several other leading banks are expected to follow RBS's lead and launch their own rights issues.
Exalted company, however, may not be enough to save one likely victim of RBS's U-turn. In the banking world, retribution can be swift, and Sir Fred himself is already being tipped for the chop.Reuse content