What to do with the Royal Bank of Scotland? Nationalised, in effect, five years ago, it was never meant to have spent this long in the public sector and the sooner it is returned to the private sector, the better. The Government should not be in the business of owning a commercial bank. The only possibly reason for it to do so, occasionally hinted at by the Business Secretary, Vince Cable, is if it has an explicit “social” remit. This might include a more lax attitude to lending to small business; providing seed capital for Dragons’ Den-type entrepreneurs as a quasi-National Investment Bank or even fulfilling the sort of role the payday lenders provide to the poorer sections of society, but at more humane rates of interest and a more indulgent attitude to default.
All of those are worthy aims, and would right many social wrongs, but they would not necessarily improve the commercial performance of the bank, and would, in effect, require a continuing taxpayer subsidy to deal with bad debts and other losses involved in doing the sort of business the other banks find too risky. In any case, such an institution would soon fall foul of EU rules on competition. So even if the nation wanted to get itself a “softy” bank, it is pretty much impossible.
Which leaves the purely practical question of what is the best way to move it back to a proper commercial footing in the private sector. Its problem is its “toxic debt”. Some of this debt may not be as toxic as it was – we have seen quite a bounce back in some asset prices from their apocalyptic nadirs a few years ago. Nonetheless, RBS has more than its fair share of such problematic loans and securities. So the question is how to ring-fence this “bad bank” element from the rest of the business, which is making a slow, painful recovery and should have a viable future as an independent financial entity. This “good bank” could be privatised, maybe with a public issue in the manner of Royal Mail, while the bad bank remains in the public sector until the last of its toxic loans is either paid back or defaulted upon for good. While it winds itself up, this bank would require a taxpayer subsidy, the size of which will depend on how toxic the toxic assets prove to be. That is unfair on the taxpayer, and wrong in principle, but we sold the pass on that when we nationalised the bank in the first place. Sooner or later the taxpayer will take the bulk of the losses, as an 81 per cent shareholder. There is no avoiding that and it is as well to face up to it.
Selling a “good bank” is much more straightforward than trying to sell the current RBS, simply because a sceptical investing community will rightly apply a huge discount to the value of the group because it will take the most cautious view possible of the bad debts it harbours. Thus, the taxpayer is liable to get a lower price for the “good bank” if it is sold as a package with the bad bank than if it were separated out for a clean start. An internal “bad bank” within RBS will never overcome investor suspicion in the same way as two separate entities will.
So the Treasury, with appropriate advice from the Bank of England, should get on with the sale, especially as the stock market is receptive. That it will be regarded as another political success for George Osborne does not, on this occasion, make it the wrong thing to do. It can and should be done next year. We can then put the RBS nightmare behind us, and the grim memory of Fred “The Shred” Goodwin with it.