Royal Bank of Scotland is, again, under the cosh. Indeed, two coshes: one, a report by the businessman and government adviser Lawrence Tomlinson, which claimed that it deliberately pushed viable businesses into default in order to take over their assets on the cheap; the other, from Sir Andrew Large, former deputy chairman of the Bank of England, which concluded that it was not lending enough to small and medium-sized businesses.
The first of the two charges is extremely serious – about as bad as you get. As for the second, the bank has commissioned its own report on the failure to lend to smaller businesses from the lawyers Clifford Chance, and we will see what that says. But it is a common complaint, and the fact that lending to business as a whole has been falling ever since the 2008 crisis does support the argument that shortage of funding has been holding the recovery back.
How have things come to this? It is a huge subject and all sorts of accusations get thrown around, so the first thing to be clear about is that this is not just an RBS issue. It happens to be our largest business bank, but if other banks were able and willing to step in, the business community would have options. In a properly functioning banking system, if RBS wanted its money back and the customer was indeed a viable proposition, there would be a competitor only too happy to take over.
Nor is it a “casino banking” issue - the charge levelled at banks in general and their investment banking divisions in particular that they gamble with other people’s money. This is about the most basic failure in commercial banking: failure to support viable business customers. There is a case for separating commercial banking from investment banking, just as there is a case for keeping the two together, with the right capital backing for each – one of the issues the House of Lords is considering now. But that is not the problem here. So what is?
One way to frame what RBS and the other banks have done is to look at the sea-change that has taken place in banking over the past 30 years. There has always been a tension between two roles. One is to carry out a duty of care over their customers. The other is to flog them products. A generation ago banks acted as wise advisers to their customers. People would joke: “My bank manager wouldn’t like it” when they made some extravagant purchase, and company owners would make sure they had their bank manager on side when they made major decisions.
Then, gradually, the mood shifted. Banks wanted to sell products: straightforward loans but also complex hedging products that the people selling them barely understood, let alone were able to explain. By the boom times of six years ago, the duty of care had gone out of the window. Instead bank managers were incentivised to sell, and whether or not what they were selling was in the interest of the purchaser was irrelevant. If one bank said no, there were plenty of others that would say yes.
Part of the trouble was that many customers still, at some level, assumed that the banks still felt a duty of care: that they would not make a loan or sell a product if it were not in the true long-term interest of the customer. But in boom times, even potentially duff loans came good, which reinforced the careless mood. A bank that said no was fuddy-duddy. Bankers, being human beings, were nudged towards ever‑laxer standards of scrutiny.
Then it flipped. Embedded deep in any senior bankers psyche is the nightmare that depositors suddenly want their money back and there is not enough in the tills to pay them. The slow-motion crash that started in Britain with Northern Rock and progressed to the freezing of the inter-bank market and the near-collapse of the two Scottish banks has spun the mood of bankers back to the caution of a generation ago: it is safer to say no. You could even persuade yourself that it might be safer for your customer if you say no.
That explains the reluctance to lend money to small business. Small businesses are statistically risky customers. Allow for the ones that will go under and it is not particularly profitable business either. It also explains the confusion that many borrowers feel when they are unable to repay on time and find the bank forecloses on the debt. They thought the bank had their best interests in mind and would be “helpful” if they got into trouble, then found the bank was frightened and simply wanted to enforce its contract. RBS may have gone beyond acceptable practice here, and if so that is disgraceful.
So what is to be done? What will happen, indeed is happening, is a move back towards cautious banking. I just hope that a true revival of “duty of care” will be part of that condition.
Can the Celtic Tiger roar again?
Ireland is escaping from the bail-out – it returns to the markets next month. It is not quite a “with one bound and it’s free” situation, as it now has to rely on the financial markets to fund itself. But submitting to their judgement, rather than of that of Brussels, Frankfurt and Washington, shows confidence. A visit to Dublin yesterday convinced me that a turning point has been reached.
The numbers are better. The country is no longer in recession; retail sales volume is up; job growth is quite strong; total government debt should start to fall as a percentage of GDP next year; the property market in Dublin has picked up; and as a PwC survey of chief executives shows, business is now more confident than at any time since 2007. Phew.
But if Ireland has become the poster-boy for EU bailouts, there are three causes for caution. One is that the recovery is both uneven and fragile. Dublin is coming up but the gap between the capital and the rest of the country is growing. There is a huge problem of mortgage arrears, some 15 per cent of the total loan book.
Second, the banking system is gummed up, with hardly any competition between Bank of Ireland, now recovering, and Allied Irish Banks, further down the track. Third, the social cost is huge and is carried most unevenly by people who have lost their jobs and/or emigrated, and people in their 30s who bought homes at the top of the market and can never hope to repay. If you are a small country it is a harsh world if you make a mistake.