Britain faces major obstacles to RBS break-up plan

Britain would face big obstacles to a break up of state-controlled Royal Bank of Scotland  and such a step might not achieve its ultimate aim of boosting lending to the economy, analysts and investors said.  

Britain’s government has come under pressure to consider splitting the 82 per cent state-owned bank partly because prospects for returning it to private ownership soon still seem remote five years on from its £45.5 billion ($71.25 billion) rescue in the financial crisis. The plan, backed by former British finance minister Nigel Lawson and outgoing Bank of England governor Mervyn King, has gained support because it has taken longer for RBS to return to financial health than expected while lending to the economy across British banks as whole remains sluggish.  

But analysts and investors believe a break up would be a costly, complex and lengthy process that would not necessarily benefit the economy or taxpayers. “The decisions to seriously consider a break-up into good/bad bank will further increase the uncertainty about the future shape of RBS, especially as the Chancellor (George Osborne) expects the bank to support core UK businesses,” said Espirito Santo analyst Shailesh Raikundlia.  

One of RBS’s 10 biggest investors warned the move could damage the wider economy.  “RBS’s record on new lending in the UK mortgage market is already very strong,” the investor said. “It is possible that the capital strain of a split could produce the reverse effect from that intended, that is it could actually cause less lending to the UK economy.”  

Finance minister George Osborne has said the government would investigate the case for hiving off RBS’s toxic loans into a “bad bank”, leaving a “good bank” better placed to lend to British households and businesses. Osborne said any break-up would not involve taxpayers putting in further funds.  Both Ireland and Spain have gone down the “bad bank” route to tackle their banks’ bad assets.

Cost and complexity
The Conservative-led coalition is considering hiving off RBS assets worth between £100 billion and £120 billion, according to one source familiar with the matter.  

Ulster Bank, owned by RBS, could have its non-core assets and commercial real estate assets moved into the bad bank following a break up, along with some UK commercial real estate assets of RBS, the source said. Osborne, himself, had previously rejected the idea, also citing the cost and complexity involved.

Critics have pointed out it would cost billions of pounds just to buy out the bank’s minority shareholders, which would have to happen before the break-up could take place. In his annual speech to City of London financiers on Wednesday, Osborne said, with hindsight, RBS should have been broken up five years ago.

He stopped short of criticising his Labour predecessor, Alistair Darling, who was in power at the time, admitting he had not proposed such a move in opposition.  

The Parliamentary Commission on Banking Standards, which was set up by Osborne to review the industry, had called on the Treasury to produce a report on the pros and cons of a break-up by September, a recommendation the Chancellor has heeded.  Osborne said Britain would establish an RBS “bad bank” if the review concluded the move would support the British economy, be in the interests of taxpayers and accelerate the bank’s return to private ownership.  The review will be undertaken by the Treasury with external support and will report back by the autumn. It is not yet clear whether that support would come from individuals or a financial institution.  RBS has already undertaken a mammoth restructuring, overseen by outgoing Chief Executive Stephen Hester since its rescue, shedding some £900 billion of non-core assets but it still has assets worth around £1.2 trillion.  

In contrast to RBS, the government has said it is ready to start selling its holding in rival Lloyds, also bailed out in the crisis, allowing it to claim partial success in returning the banks to health ahead of the next election in 2015.