COMMENTARY: RBS learns from financial crisis but will change be sustained?

Western Mail newspaper. The following article appeared on Monday 23rd January 2012. The views expressed are Steve's and not necessarily those of the company.

Steve Howell writes...

A senior banker apologising. Am I hearing things, I wondered, as I tucked into my starter at a South Wales Chamber of Commerce lunch the other day?

 

But I wasn’t. The guest speaker, Chris Sullivan, RBS’s corporate banking chief executive, was acknowledging mistakes that led to the near-collapse of the banking system in 2008.

 

An RBS veteran, who moved to his current role in 2009, he admitted the bailed-out bank had ‘gone off track big time’ by turning its staff from bankers to salesmen.

 

He said he had to introduce changes to reverse that trend and move away from a culture of ‘flogging products’ back to one focused on understanding customers and adding value. 

 

Whereas, the ‘old bank guys’ did things well, he said most of the generation of 4,000-plus relationship managers he inherited were not qualified bankers and needed training.

 

Their performance, he added, will now be measured by different standards. Instead of being incentivised to sell, they will be judged by the extent to which they help client businesses to be “less risky, more efficient and to grow."

 

Chris Sullivan’s comments were made shortly after RBS had announced the break up and scaling down of its investment bank to prepare for Government reforms to ring fence core UK operations from riskier activities.

The bank said it planned to close or sell off businesses, such as those dealing in shares and advising companies on mergers and acquisitions.

Overall, the changes will have the effect of reducing the loans and investments of RBS’s former investment banking division from £420bn to £300bn over three years, freeing up capital for lending to UK businesses.

RBS will, apparently, be able to double its business lending. Companies eligible for invoice or asset based finance will fare best, and RBS has pledged to give customers the security of guaranteeing stable rates for a minimum of a year.

 

But don’t expect a reduction in the cost of borrowing as banks insulate themselves against risk and try to generate profits in a more conservative environment.

 

The business people at the lunch received all this with appreciation for its frankness but some scepticism about whether or not RBS’s mending of its ways could be sustained.

 

Would the current commitment to being an ‘exemplar’ disappear with a change of personnel or when a future boom encouraged another Fred Goodwin-style drive for growth through risky lending and casino-style trading?

 

RBS may now be restrained by being 82% state owned. But, if it returns to being accountable only to shareholders demanding the highest return and most exciting expansion plans, will it revert to the short cuts of the past?

 

The government’s reforms may go some way towards providing the regulatory framework to prevent this happening.

 

But, as one person pointed out at the lunch, this will put RBS at a competitive disadvantage if the same rules are not applied internationally to every bank.

 

This problem would not be so acute, of course, if RBS remained in public ownership or was transformed into a mutually owned business in some way.

 

The Principality Building Society and most other institutions in the mutual sector did not get caught up to the same extent in the short-termism that led to the financial crisis.

 

For more than a century, building societies provided a relatively stable credit system for the private housing market, lending on sensible criteria that meant house-buyers were more likely to be able to cope when prices fell.

 

It can hardly be a coincidence the demutualisation of the 1990s – that led to building societies such as Northern Rock becoming banks – occurred at the same time as RBS was converting its relationship managers into salesmen.

 

Both developments helped produce a suicidal relaxation of lending criteria and an unsustainable credit-fuelled boom, the consequences of which were so cataclysmic.

 

There has understandably been anger at the bonuses paid to top bankers, but an end to these obscene payments would be a hollow victory if it is not accompanied by systemic reform of the banking sector as a whole.

 

Apologies are welcome, but prevention is better.

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