tag:theconversation.com,2011:/global/topics/rbs-3372/articlesRBS – The Conversation2019-12-03T10:31:05Ztag:theconversation.com,2011:article/1281572019-12-03T10:31:05Z2019-12-03T10:31:05ZRBS’s Bó: the fightback against Monzo and Revolut is about much more than market share<figure><img src="https://images.theconversation.com/files/304730/original/file-20191202-67034-dyxtjt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Close to the Bó. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stone-staffordshire-uk-november-19-2019-1564870870">Ascannio</a></span></figcaption></figure><p>Banks always seem to be doing something to upset us. Lately, for instance, they have been getting pilloried for <a href="https://www.theguardian.com/money/2019/sep/24/more-than-a-third-of-uk-bank-branches-have-closed-since-2015">shutting branches</a> and <a href="https://www.bbc.co.uk/news/business-49730367">taking away</a> cashpoints. But in reality, banking is just going the way of CDs, high street travel agents, or standing by the roadside in the rain trying to hail a cab. The world has changed. The upcoming generations don’t see the same need to visit a physical branch, let alone use paper money. </p>
<p>To satisfy this demand, a rash of digital-only banks has sprung up in the UK in the past five years, such as <a href="https://monzo.com/">Monzo</a> and <a href="https://www.revolut.com/">Revolut</a>. They have no branches; operate via apps with 24-7 live support; and offer services such as real-time spending notifications, free payments abroad and virtual debit cards that can be used immediately through Apple Pay or Google Pay. </p>
<p>It is often incredibly easy to become a customer, signing up for an account online without even talking to anyone. In a short space of time, this has begun to threaten the incumbents. <a href="https://www.thisismoney.co.uk/money/saving/article-7647253/Monzo-accounts-half-UK-digital-challenger-bank-market-data-finds.html">Market leader</a> Monzo, for instance, <a href="https://monzo.com/blog/2019/09/16/three-million">has signed up</a> more than 3m UK customers since launching in 2015 – albeit such operators are <a href="https://www.fstech.co.uk/fst/Monzo_Losses_Up_54_Per_Cent.php">still making losses</a> which seem to be ever growing. </p>
<p>At any rate, now comes the fight back: RBS has just become the first major UK bank to launch a competitor into this space in the form of Bó, complete with a money-managing app and snazzy yellow debit cards. Other incumbents such as <a href="https://uk.reuters.com/article/uk-britain-banks-digital-plans/hsbc-and-rbs-set-to-launch-new-digital-banking-platforms-idUKKBN1XL1CX">HSBC</a> and <a href="https://www.telegraph.co.uk/business/2018/05/12/santander-launch-stand-alone-uk-digital-bank/">Santander</a> have digital designs of their own. So how well placed are these banks to defend their patch?</p>
<h2>The starting gun</h2>
<p>Banking took longer than most industries to take advantage of the <a href="https://www.weforum.org/about/the-fourth-industrial-revolution-by-klaus-schwab">fourth industrial revolution</a>, mainly because of regulation. Until a decade ago, regulators would not authorise new banks unless they were completely sure they would be “safe”. They would not permit bank software to use cloud services or to be bought in rather than made in-house, both of which massively reduce the cost of opening a new bank. </p>
<p>This <a href="https://www.fca.org.uk/news/press-releases/fsa-and-bank-england-relax-barriers-entry-new-bank-entrants">changed</a> when the Financial Conduct Authority (FCA) took over as regulator in 2013. The government was <a href="https://www.reuters.com/article/uk-britain-fsa-idUKLNE89F00120121016">keen to</a> shake up banking in the wake of the financial crisis of 2008-09, and <a href="https://www.rpc.co.uk/perspectives/financial-services-regulatory-and-risk/the-fsas-journey-to-the-fca/">explicitly required</a> the FCA to not only protect consumers but to encourage competition, too. </p>
<p>This put the UK at the forefront of the new digital banking industry. A similar trend is <a href="https://www.altfi.com/article/5902_monzo-surpasses-50-of-uk-challenger-banking-market-share">taking place</a> elsewhere, such as <a href="https://www.nsbanking.com/analysis/digital-banks-usa/">the US</a>, <a href="https://www.bloomberg.com/news/articles/2019-08-06/german-challenger-banks-target-firms-as-competition-heats-up">Germany</a> and <a href="https://www.legalbusinessonline.com/features/explainer-could-virtual-bank-licences-shake-hong-kong%E2%80%99s-traditional-banking-sector/77976">Hong Kong</a>, where even traditional players like Bank of China have acquired a “virtual” licence, and will learn from operating a digital-only bank whether to import the idea to the mainland. </p>
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<a href="https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=396&fit=crop&dpr=1 600w, https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=396&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=396&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=497&fit=crop&dpr=1 754w, https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=497&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/304728/original/file-20191202-67023-1rz5gfc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=497&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">New kids on the block.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stone-staffordshire-united-kingdom-july-26-1462200275">Ascannio</a></span>
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<p>The challenge for so-called legacy banks everywhere is that altering the course of a tanker is difficult. The very name “legacy” comes from the fact that their IT, though it works well in many regards, is outdated. Their systems are underpinned by <a href="https://www.networkworld.com/article/3148714/why-banks-love-mainframes.html">IBM-type “big iron” mainframes</a> that run on COBOL, an old programming language that is difficult to integrate with the innovations that customers now want and expect from digital banking. It costs a high proportion of bank IT budgets just to keep the old computer code working – yet it is too difficult to replace old systems while keeping a bank functioning. </p>
<p>This problem of traditional banks stuck in the past goes further than tech. They also often have issues with organisational structure. The old way of running a bank was – and still is – to have silos for IT, operations, marketing, business/products and of course HR. When a new product or feature is required, the business side will usually “throw the specifications over the wall into the cage” of the IT side and let them get on with it. Six months later or whenever, the IT side will come back with the product. </p>
<p>The new banks operate quite differently. They <a href="https://hackernoon.com/enterprise-is-dead-long-live-agile-c4758f9049ff">focus</a> on so-called <a href="https://www.dummies.com/store/product/Agile-Project-Management-For-Dummies-2nd-Edition.productCd-1119405696.html#">“agile” principles</a>, which develop products/updates using “squads” or <a href="https://medium.com/@agileexpat/the-story-of-one-teams-evolution-with-scrum-ecd841f8f81f">“scrums”</a> of people from relevant departments who are jointly responsible for the project. It’s a less hierarchical approach that may involve producing a quick prototype in
“sprints” of as little as two weeks. It will then be beta-tested by customers to garner feedback, and then refined – similar to when Microsoft, for example, <a href="https://support.microsoft.com/en-gb/help/833520/how-to-apply-to-become-a-beta-tester-for-microsoft">issues new software</a> to select customers. </p>
<p>Any company can adopt this cultural approach, though of course legacy IT makes it much harder for traditional banks. Having said that, the best example is arguably from that side of the fence: DBS Bank of Singapore, which is active across Asia, <a href="https://www.euromoney.com/article/b1g6954mhxl7sl/euromoney-names-the-worlds-best-banks-in-its-2019-awards-for-excellence">was crowned</a> Euromoney Bank of the Year 2019 for “embedding digital innovation into everything it does”. </p>
<h2>Bó arrives</h2>
<p>In contrast to DBS Bank, RBS and other traditional UK banks appear to be backing two horses – the old and the new. RBS/NatWest is both modernising the traditional operation with things like banking apps and virtual cards, while also setting up Bó for retail customers – as well as another brand called Mettle for businesses. Both will compete with the existing retail bank, though RBS/NatWest may incentivise its customers to transfer across. </p>
<p>Bó is certainly more likely to appeal to <a href="https://www.finder.com/uk/digital-banking-adoption">millennials</a> and <a href="https://www.fstech.co.uk/fst/Crealogix_Millennials_GenZ_Banking_Habits.php">Gen Z</a> than to older generations, and thus may be a good gateway to ensuring that the RBS Group keeps attracting young customers. Unlike rivals like Starling and Monzo, however, it <a href="https://www.moneysavingexpert.com/news/2019/11/natwest-launches-bo/">does not yet</a> have all the features of a full-service bank. So, for instance, while the app gives you instant-spending notifications and lets you create spending budgets, there is no offer of interest on savings and no overdraft facility. There is also no Google/Apple Pay feature. </p>
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<a href="https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/304729/original/file-20191202-67028-1dfjkyu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Museum piece?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stone-staffordshire-united-kingdom-july-26-1462200275">Matt Rakowski</a></span>
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<p>Some people in the industry <a href="https://www.telegraph.co.uk/technology/2019/11/28/rbss-new-banking-app-bo-doesnt-need-remake-banking-order-succeed/">have accused</a> RBS of doing too little too late for this venture to be successful, predicting it will lose interest after a year or two. This ignores RBS’s major incentive here: if Bó and Mettle succeed, it will make it easier for RBS to close branches in future, and to move away from the ancient IT architecture that makes it so difficult for legacy banks to progress. </p>
<p>RBS/NatWest could then have the pre-conditions for future financial success - top-class IT, greatly reduced costs and a large enough customer base to make Bó profitable - a great combination that the independent start-ups yet lack. For some challengers, their best hope must still be that an incumbent bank launches a bid for them at some point in the future.</p><img src="https://counter.theconversation.com/content/128157/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Scott-Quinn provides financial training services to Bank of China in London. </span></em></p>New digital bank Bó is the first attempt by a high street bank to beat the likes of Monzo and Revolut at their own game.Brian Scott-Quinn, Emeritus Professor of Finance, ICMA Centre, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/807702017-07-11T14:53:02Z2017-07-11T14:53:02ZHow to drive Britain’s new industrial strategy<figure><img src="https://images.theconversation.com/files/177698/original/file-20170711-29298-r9qeip.jpg?ixlib=rb-1.1.0&rect=153%2C172%2C3895%2C2604&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/welding-robots-movement-car-factory-382246279?src=Hqu_mojhRPaD0G4sVjzArw-1-21">wi6995/Shutterstock</a></span></figcaption></figure><p>The desire to design and deliver an industrial strategy for the UK was shaped in its earliest days by a then lowly young politician called Winston Churchill. And the current government has put the idea <a href="https://www.gov.uk/government/news/pm-unveils-plans-for-a-modern-industrial-strategy-fit-for-global-britain">back at the centre</a> of British politics. The trick, however, will be to acknowledge just how big the job is, and how many disparate elements must come together to make it work. </p>
<p>The Industrial Strategy Commission, a body set up by the universities of Sheffield and Manchester, has published <a href="http://industrialstrategycommission.org.uk/2017/07/10/laying-the-foundations-the-first-major-report-by-the-industrial-strategy-commission/">an initial report which is</a> the latest contribution to this age-old debate. It makes some good points, particularly on the powerful links between industry and business services and the need to improve access to finance for investment.</p>
<p>The nature of investment is key. A century ago Britain was the world’s leading economy, before losing out to the US and Germany, then Japan and China – all because their industries <a href="https://www.jstor.org/stable/2234943?seq=1#page_scan_tab_contents">outperformed Britain’s</a>. Why did that happen? Unlike industry in the US, Germany, Japan and China, Britain’s has been dominated by finance. The City of London developed largely to service Britain’s empire, while the financial sectors in the other countries invested primarily to service domestic industry. Churchill by contrast <a href="https://www.forbes.com/sites/dinamedland/2014/05/27/finance-less-proud-and-industry-more-content-london-talks-inclusive-capitalism/#6ee34d8b48c0">had wanted to see</a> “finance less proud and industry more content”. </p>
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<a href="https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177690/original/file-20170711-29291-17j0258.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Lessons from the last century.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bronze-statue-winston-churchillformer-british-prime-345530786?src=jryAGS03q8d5LragraIAMg-2-34">tviolet/Shutterstock</a></span>
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<h2>A new, New Deal</h2>
<p>Britain has since suffered from a lack of investment. The public has continued to consume more manufactured products, but these have increasingly come from Germany, China, and other more successful economies. </p>
<p>It is important that banks invest long-term in industry. More specifically, the state-owned Royal Bank of Scotland could be transformed into an industrial investment bank, funding a “Green New Deal”, recalling <a href="http://www.history.com/topics/new-deal">Franklin Roosevelt’s project</a> to lift the US out of the Great Depression.</p>
<p>I argue that funds from a Green New Deal should be invested in productive and social infrastructure, creating the drivers for environmentally and socially sustainable growth, devolved across <a href="http://www.e-elgar.com/shop/advanced-introduction-to-globalisation">the UK’s nations, regions and localities</a>. This would help to address regional imbalances which have been exacerbated by the UK’s reliance on the City of London. For evidence of that, look no further than the economic recovery since 2008 which has only delivered <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech916.pdf">increases in income per head</a> in London and the south-east where wealth and investment have long been concentrated.</p>
<h2>Short-termism</h2>
<p>Britain has also suffered from a sustained lack of corporate diversity, as documented in a 2012 report <a href="http://www.kellogg.ox.ac.uk/wp-content/uploads/2015/05/ownership_commission_2012.pdf">from the Ownership Commission</a>. The 2010 coalition government pledged to do something about it but in fact, <a href="https://www.soas.ac.uk/news/newsitem83515.html">there was a deterioration</a>. A simple step to improve this would be a vigorous promotion of mutuals – financial institutions owned by customers rather than shareholders.</p>
<p>Other advanced economies have a strong base of small and medium-sized firms, long-standing family ownership, and a range of co-operative, mutual and employee-owned companies, but the British economy is dominated by large shareholder-owned firms.</p>
<p>This in turn has encouraged a tendency to short-termism among corporate leaders, who focus their energies on quarterly profits and dividend payments to bolster share prices. Another contributory factor <a href="http://www.libdemvoice.org/opinion-the-uks-takeover-laws-and-shorttermism-42171.html">is said to be</a> the threat of hostile takeover, which causes managers to take short-term measures to maintain the share price (when shares fall, a company can start to look like a bargain).</p>
<p>The controversial <a href="http://www.bbc.co.uk/news/business-27258143">hostile takeover of chocolate maker Cadbury</a> by the US food multinational Kraft in 2009 signalled that the UK should perhaps become more like other economies, which retain the right to block takeovers of companies regarded to be of strategic importance, and where boards of directors have more discretion to reject bids. </p>
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<a href="https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177697/original/file-20170711-29286-1htk2sa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Can chocolate be a strategic asset?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/putrajaya-malaysia-march-7-2016-cadbury-387845905?src=owRfVqPJpx9swn0zxbvb8w-1-7">Faiz Zaki/Shutterstock</a></span>
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<p>An effective industrial strategy also needs to address imbalances in pay, where inequality and low wages effectively subsidise inefficiency. Hence Churchill in 1909 <a href="https://books.google.co.uk/books?id=8jWwCwAAQBAJ&pg=PA185&lpg=PA185&dq=the+good+employer+is+undercut+by+the+bad,+and+the+bad+employer+is+undercut+by+the+worst&source=bl&ots=iRa-adeeUf&sig=AJRajPkBrIwxlHf3Q0TSzFgid8o&hl=en&sa=X&ved=0ahUKEwj3ienE7IDVAhULaVAKHRDnAGkQ6AEINjAD#v=onepage&q=the%20good%20employer%20is%20undercut%20by%20the%20bad%2C%20and%20the%20bad%20employer%20is%20undercut%20by%20the%20worst&f=false">promoted minimum wage standards</a>, otherwise “the good employer is undercut by the bad, and the bad employer is undercut by the worst”. In truth, the UK has <a href="https://www.gov.uk/government/publications/national-living-wage-nlw/national-living-wage-nlw">made some progress</a> on this issue, but the emerging challenge now is to ensure that the minimum wage and living wage can be effective <a href="http://www.bbc.co.uk/news/business-40561807">across the “gig economy”</a>.</p>
<p>Finally, the UK labours under <a href="http://www2.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2017/04/19/uk-sleepwalking-into-skills-crisis-cipd-warns.aspx">a lack of sufficient</a> research, innovation, education and training. Previous governments made matters worse <a href="http://www.hefce.ac.uk/lt/elqs/">by withdrawing funding</a> from students who seek to retrain in order to make career shifts which could boost emerging industries.</p>
<p>There is also the threat from Brexit. This isn’t just about funds, it’s also about European researchers being able to work in the UK, and about building upon existing successful research collaborations. The good news is that large increases in public funding for research, innovation, education and training <a href="https://www.gov.uk/government/topical-events/autumn-statement-2016">were announced</a> in the 2016 Autumn Statement, so of all the pressure points this looks the most promising.</p>
<p>But industrial strategy needs to address every policy area if progress is to be made. Churchill pointed the way, from the creation of minimum wages, to promoting the interests of industry rather than finance. Now we must pursue the six-pronged approach which promotes corporate diversity while addressing hostile takeovers, regional imbalances, short-termism and wages in the gig economy. All of that must take place while making sure increased investment into research leads to innovations which are adopted successfully by firms and then diffused across the economy, underpinning sustainable growth.</p><img src="https://counter.theconversation.com/content/80770/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Michie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>From Winston Churchill to the Industrial Strategy Commission: laying down the markers for success.Jonathan Michie, Professor of Innovation & Knowledge Exchange, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/696972016-12-01T13:30:18Z2016-12-01T13:30:18ZBanks like RBS still look risky, but getting too tough could cause greater problems<p>Even in less politically volatile times, the <a href="http://www.bbc.co.uk/news/business-38135133">news that</a> the UK’s biggest bank, RBS, failed the Bank of England’s toughest ever “<a href="http://www.bankofengland.co.uk/publications/Pages/news/2016/stresstesting.aspx">stress tests</a>” would have dampened financial spirits. The bank must now raise an extra £2 billion to protect itself from future downturns. This may be made easier because RBS is <a href="http://investors.rbs.com/share-data/equity-ownership-statistics.aspx">73% publicly owned</a>, but that’s an unwelcome legacy of its <a href="http://www.ifre.com/the-fall-and-partial-rise-of-rbs/21052458.fullarticle">exceptionally poor</a> condition after the crash of 2007-08. </p>
<p>Meanwhile, the Bank of England (BoE) singled out two other banks – Barclays and Standard Chartered – for having “some capital inadequacies”. So why haven’t eight years of economic recovery cured the banks’ woes?</p>
<p>Banks remain solvent as long as their assets, the money they’ve lent to borrowers or invested, exceed their liabilities, the money they’ve borrowed from depositors or other lenders. If the economy worsens, a bank’s assets can fall because their investments lose value and “non-performing” loans have to be written off. </p>
<p>For this reason, the core “equity” capital that banks have raised from shareholders is regarded as a safety margin between assets and liabilities; unlike loans, it never has to be repaid. For building societies, accumulated reserves take the place of shareholders’ equity in providing this buffer. </p>
<h2>Stressful times</h2>
<p>Stress tests calculate the fall in a bank’s asset values under various adverse economic scenarios. If a shock looks big enough to wipe out the “Tier 1 capital” safety margin, the bank is asked to raise more capital and/or boost the value of assets or make them better <a href="http://www.investopedia.com/articles/basics/03/080103.asp">hedged</a> against losing value. The BoE and European Central Bank are <a href="https://www.ft.com/topics/themes/Bank_stress_tests">among the institutions</a> that have regularly conducted these tests since banks were caught with their capital ratios down in 2008. </p>
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<p>Downturn became crisis in 2007-08 because, in the <a href="http://www.federalreservehistory.org/Events/DetailView/65">unusually long and placid upturn</a> beforehand, banks ran their core capital to dangerously low levels. Regulators <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech745.pdf">found</a> Tier 1 capital in some cases to be worth just 1-2% of assets, once they removed permitted adjustments that exaggerated the capital and understated the risks to asset value. </p>
<p>The Bank of International Settlements (BIS), the central bank for central banks, duly <a href="http://www.bis.org/publ/bcbs189.pdf">imposed</a> stricter requirements. These included core capital equal to at least 8% of what are known as risk-weighted assets – a system that sets lower capital requirements for assets considered less risky. Acknowledging that this system had itself contributed to risk being underestimated, the BIS also <a href="http://www.bis.org/publ/bcbs270.pdf">recommended</a> a minimum “leverage ratio” of capital to total assets. (The BoE <a href="http://www.bankofengland.co.uk/publications/Pages/news/2016/062.aspx">has continued</a> to argue over the terms of this, fearing it could erode the cushion of reserves it’s supposed to promote.) </p>
<h2>Alarm bells?</h2>
<p>RBS failed the latest test, having passed in previous years, because the terms have been toughened. That’s a recognition that simultaneous setbacks could hit the world’s major economies before the BIS reforms are fully in place in 2019. If loans to businesses, individuals and governments in multiple countries all started going bad, banks’ assets fall much further than if it’s just one sector in one country. Countries’ problems became <a href="http://news.bbc.co.uk/1/hi/business/7073131.stm">contagious</a> in 2008 when household and corporate assets, especially property, plunged on both sides of the Atlantic. </p>
<p>Policy measures taken to calm the last crisis might have raised the risks of another. Low interest rates and “<a href="http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx">quantitative easing</a>” have encouraged more household and commercial debt, driving up property and financial asset prices. China, whose <a href="https://www.lincolninst.edu/sites/default/files/pubfiles/zhao-wp16sz2-full_0.pdf">property bubble</a> looks particularly pronounced, is among the greatest worries. Governments <a href="https://www.bloomberg.com/news/articles/2016-02-22/the-world-s-debt-is-alarmingly-high-but-is-it-contagious">have also</a> exacerbated their debts by spending to try to stop national output and price levels falling, leaving them ill-equipped to rescue collapsing banks again.</p>
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<a href="https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=802&fit=crop&dpr=1 600w, https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=802&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=802&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1007&fit=crop&dpr=1 754w, https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1007&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/148283/original/image-20161201-25682-h5nz72.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1007&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">American economist, Irving Fisher.</span>
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<p>These worries are deepened by the possibility that banks’ capital and reserves are still too low to withstand shocks. Some experts believe they need to rise by a factor of ten or more in relation to assets for the system to be totally safe. That view, <a href="https://fraser.stlouisfed.org/files/docs/meltzer/fisdeb33.pdf">pioneered</a> by the American economist Irving Fisher, who identified the dangers of “debt deflation” in the 1930s, now has a <a href="http://positivemoney.org/2014/04/strip-private-banks-power-create-money-financial-times-martin-wolf-endorses-positive-moneys-proposals-reform/">range of powerful advocates</a> including distinguished commentator Martin Wolf. </p>
<p>Wolf was a member of the UK’s Independent Commission on Banking, which in 2011 <a href="http://webarchive.nationalarchives.gov.uk/20131003105424/https:/hmt-sanctions.s3.amazonaws.com/ICB%20final%20report/ICB%2520Final%2520Report%5B1%5D.pdf">accepted</a> the BIS’s recommendation of raising core capital to 8% of risk-weighted assets. More recently <a href="http://positivemoney.org/2014/04/strip-private-banks-power-create-money-financial-times-martin-wolf-endorses-positive-moneys-proposals-reform/">he argued</a> it should be 100%. Where the current system reflects the fact that banks create money when they lend it, this “full reserve banking” would mean they could only lend what they had raised from the markets. </p>
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<h2>Regulatory dilemmas</h2>
<p>Critics counter that such a radical move could bring the stability of the graveyard. It would give governments (via their central banks) complete control over their economies’ supply of money. Whereas banks currently generate most of the money supply by lending, they would be reduced to intermediaries channelling savings into investment. </p>
<p>For economic liberals, this would give the state an <a href="https://wiki.mises.org/wiki/Full_reserve_banking">unacceptable monopoly over money</a> – unless it returned to a <a href="http://economics.about.com/cs/money/a/gold_standard.htm">gold standard</a> that tied its currency to precious metals, which would effectively put a ceiling on how much money it could create. <a href="http://www.nakedcapitalism.com/2014/06/banks-must-allowed-create-money.html">Others fear</a> any substantial move away from the present “fractional reserve” system would cause a huge downturn while banks run down their lending and boost their capital. </p>
<p>Even then, central banks <a href="https://www.sheffield.ac.uk/polopoly_fs/1.448817!/file/paper_2015008.pdf">might be</a> no better than now at phasing credit growth with economic growth to keep prices and production stable. And a gold standard might be <a href="https://realcurrencies.wordpress.com/2012/02/19/why-gold-is-so-strongly-deflationary/">inherently deflationary</a>, unless breakthroughs in mining (or alchemy) kept precious metal stocks expanding in step with national output.</p>
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<a href="https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=800&fit=crop&dpr=1 600w, https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=800&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=800&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1005&fit=crop&dpr=1 754w, https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1005&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/148310/original/image-20161201-25660-1pu9zk9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1005&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">From out of the shadows …</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/pic-44078725/stock-photo-scene-at-night-robbery-of-the-safe.html?src=ooa1BrCJIbbiTLdlfOD9xw-1-36">Inhabitant</a></span>
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<p>But above all, private enterprise would always innovate to break this public monopoly. This is already visible in the rise of “shadow banking” – loans by institutions like hedge funds and private equity funds that escape bank regulation because they technically aren’t banks. Official <a href="http://www.fsb.org/wp-content/uploads/global-shadow-banking-monitoring-report-2015.pdf">statistics</a>, which may understate the true situation, show shadow banking assets rising steadily to 12% of the total since regulation began tightening, mostly in rich economies where banking rules are tightest. </p>
<p>If once aberrant lenders like RBS are forced to mend their ways too radically, the next boom might just be powered from the shadows, causing new bubbles to burst in an even darker place. So central banks will stick to their present plan for gradual increases in capital, hoping any <a href="http://www.investopedia.com/news/uk-faces-slower-growth-more-debt-2017/">coming slowdown</a> in growth won’t topple the banks that proved unstressed by their latest test.</p><img src="https://counter.theconversation.com/content/69697/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What are we to make of RBS failing the Bank of England’s stress tests?Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/675932016-10-25T13:53:26Z2016-10-25T13:53:26ZWill Germany flout Europe’s bail-in rules if Deutsche Bank needs rescuing?<figure><img src="https://images.theconversation.com/files/143079/original/image-20161025-31489-twz1t6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Troubled towers: the HQ in Frankfurt.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/xingxiyang/13568965704/in/photolist-mF3uLy-7ft4dF-9pzhx7-djvQ4m-7yaxPh-e7dDr5-aBA6JJ-7fK6oT-2N1sSa-osPyao-pk2LCy-89tXH-g8xTQz-7RYt47-f6fq2-iz15s-5gt8nn-9AFCXP-8W3tnr-7yay9J-7AeBzU-49C6Ro-d2si4-4cAwah-9ocaaM-qCb9-aH4tbP-4Tws41-cmfhYb-5iSTTR-6PqKBE-9MXaHr-9oVcVi-aWxvs2-gjPCso-9fFFfy-9H33Dr-bVSdFW-NhuML-ppxzDB-hKggUH-qPPT6L-avjozw-6Bvcsr-qVk8V-eqWDmB-9pzdHE-mS4fv-4cBURH-7V3XA">Kiefer</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Will Deutsche Bank need rescuing? It’s a question that is being asked as this big beast of global banking gears up to announce its third quarter results on October 27. With losses <a href="http://www.hitc.com/en-gb/2016/10/24/deutsche-bank-predicted-to-reveal-a-loss-this-week/">expected</a> to be north of €600m (£534m), the backdrop is dismal: Deutsche Bank is in talks with the US Department of Justice (DoJ) about a massive fine following an investigation into mis-selling toxic assets by the bank’s US division in the run up to the financial crisis of 2007-08. </p>
<p>The DoJ <a href="http://fortune.com/2016/09/16/deutsche-bank-doj-mortgages-case/">requested</a> US$14 billion (£11.4 billion) from Deutsche Bank to settle the case last month. The final settlement, which is due any time, <a href="http://www.cnbc.com/2016/10/20/deutsche-bank-vs-doj-heres-why-its-all-taking-so-long.html">may come in</a> somewhere around half that. But that would still be more than the €5.5 billion Deutsche Bank has set aside as a litigation reserve, and there are further losses still expected. </p>
<p>With shares <a href="http://www.cityam.com/252061/deutsche-bank-predicted-reveal-loss-week-and-doesnt-look">down by</a> close to half since the start of the year, albeit recovered a bit recently, there have been <a href="http://www.bbc.co.uk/news/business-37496268">reports that</a> the German government is planning a rescue by buying a stake if the DoJ fine is too onerous. The government denied this, but it raised an interesting question about what will happen if Deutsche Bank does fail. </p>
<p>Under <a href="https://www.ft.com/content/8ad2ed98-d0a0-11e5-986a-62c79fcbcead">EU rules</a> that came into effect in January, there can be no government bailouts of banks until there has been a bail-in – meaning other creditors to the bank such as bondholders and large depositors taking a share of the pain. The rules are highly controversial and I suspect the Germans will not want to impose them. If so, it will set the scene for an almighty row about double standards. </p>
<h2>Bailouts and bail-ins</h2>
<p>The new bail-in rules, known as the <a href="http://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32014L0059">Bank Recovery and Resolution Directive</a>, are a response to the 2007-08 banking collapses. They were inspired by the UK’s <a href="http://www.legislation.gov.uk/ukpga/2009/1/contents">Banking Act 2009</a>, which was passed in the wake of the bailouts of the likes of RBS and Northern Rock. </p>
<p>Britain had previously been shamefully lacking in legislation to cope with bank insolvencies. The new act gave the Bank of England draconian powers to cope with future crises, including the right to modify the amounts owed to creditors on a struggling bank’s balance sheet. This was designed to avoid the need to inject public money in future by making others foot the bill instead. </p>
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<a href="https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Who rescues who?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-312411911/stock-photo-an-emergency-tire-floating-in-a-pool-symbolic-photo-for-rescue-and-crisis-management-in-the-financial-crisis-and-banking-crisis.html?src=T2JJO0oqd57lXaO3EaFeHQ-1-44">Lisa S.</a></span>
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<p>Under the EU’s 2014 directive, there can be no government bailout of a bank until at least 8% of its liabilities have been absorbed. This is a complete break from the past. It means that if a bank becomes insolvent and can’t raise fresh funds from its shareholders, certain liabilities may be reduced by the management in consultation with the country’s financial authority. </p>
<p>One of the main ways in which banks and other businesses raise capital is to issue bonds. Saving vehicles such as pension funds buy these in the expectation they will get the full amount back with interest at the maturity date. But not any more. Now even in a better scenario, the right of these most cautious of savers to be repaid might merely be downgraded to rank the same as all the ordinary creditors waiting to get their money back. The only bank liabilities that cannot now be modified are customer deposits up to roughly £90,000 and a few untouchable exceptions such as employee salaries. </p>
<h2>Double standards?</h2>
<p>Bailouts essentially protect bondholders to the detriment of the taxpayer, whereas bail-ins do the opposite. Before the new rules were introduced, several test cases showed how divisive bail-ins can be. Cypriot depositors were furious to <a href="http://business.inquirer.net/112981/savings-account-seizure-plan-draws-fury-in-cyprus">lose savings</a> en masse when Brussels insisted on a bail-in as a condition of bailing out Cyprus in 2013. There was <a href="https://www.ft.com/content/8ad2ed98-d0a0-11e5-986a-62c79fcbcead">similar uproar</a> and threats of lawsuits when bondholders of Novo Banco of Portugal had their assets written down last year. </p>
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<a href="https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=643&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=643&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=643&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=808&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=808&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=808&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Italians do it different.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-172285184/stock-photo-piggy-bank-with-flag-coating-over-it-isolated-on-white-italy.html?src=m0osssv7EzLDXUIbCo_otA-1-8">Niyazz</a></span>
</figcaption>
</figure>
<p>And while it might make sense from a northern European legal perspective that taxpayer interests should prevail over bondholders, not all countries see it that way. In my native Italy, for instance, public saving has been heralded as a fundamental value for decades. Italy’s banking association <a href="http://www.politico.eu/article/italy-bank-crisis-renzi-bail-in-commission/">questioned whether</a> the EU bail-in mechanism is consistent with the country’s constitution. </p>
<p>There is also the feeling in southern Europe that there are double standards at play with the new rules. Where German and British banks needed bailed out after 2007-08, goes the narrative, the likes of the Italian banks weathered the crisis. They caught a different virus from 2011 onwards after being forced to buy toxic sovereign bonds issued by their governments to stay solvent during the eurozone crisis. </p>
<p>The sense is that British and German politicians and their respective bankers cleaned their respective “houses” with bailouts and promoted the bail-in once the job was done, thinking their banks wouldn’t have to deal with it. </p>
<p>Yet as Deutsche Bank is finding out, you never know what is around the corner. If the worst comes to the worst, I doubt the Germans will follow these Anglo-Saxon rules. It is more likely that there will be a German exception. </p>
<p>If so, it will be a classic example of how hard it is to make rules for the whole of the EU. I can hear the objections from the south of Europe already. Had it been an Italian or Spanish bank, they will say, it would have sparked the traditional tantrum against the peculiar Mediterranean way of interpreting rules and ultimately circumventing them. Unfortunately it will be hard not to agree with them.</p><img src="https://counter.theconversation.com/content/67593/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pierre Sinclair de Gioia Carabellese does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If Berlin doesn’t apply divisive rules that inflict pain on savers, expect cries of double standards from southern Europe.Pierre Sinclair de Gioia Carabellese, Associate Professor of Business Law, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/546192016-02-12T14:15:22Z2016-02-12T14:15:22ZOur obsession with scientists on bank notes is wearing thin<figure><img src="https://images.theconversation.com/files/111302/original/image-20160212-29214-vz9uq4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The usual suspects</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/bankofengland/12208082693/in/photolist-Du3xLd-jRZ6Y6-jM6r5Z-iBTaBU-jQA1mg-jYQKna-8UKcbp-iFBwXC-jAMBEn">BankofEngland.co.uk</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The civil engineer, the science communicator or the physicist? That was the question <a href="http://www.theguardian.com/business/2016/feb/10/scientist-mary-somerville-scottish-10-note-royal-bank-scotland">Royal Bank of Scotland asked</a> the public as part of its plans for a new £10 note in 2017. Science communicator <a href="http://www-history.mcs.st-andrews.ac.uk/Biographies/Somerville.html">Mary Somerville</a> was declared the winner, beating the engineer <a href="http://www.history.co.uk/biographies/thomas-telford">Thomas Telford</a> and the physicist <a href="http://www.clerkmaxwellfoundation.org/html/about_maxwell.html">James Clerk Maxwell</a> – despite a <a href="http://www.scotsman.com/business/mary-somerville-to-appear-on-new-royal-bank-of-scotland-10-note-1-4026889">row over rigging</a> that delayed the announcement by a few days. The poll was supposed to be about choosing a Scot with significant achievements in science and innovation, but it became a question about gender. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=730&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=730&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=730&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=917&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=917&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111296/original/image-20160212-29214-1j0b4qb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=917&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Ten-pound Mary.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bankofengland/12208082693/in/photolist-Du3xLd-jRZ6Y6-jM6r5Z-iBTaBU-jQA1mg-jYQKna-8UKcbp-iFBwXC-jAMBEn">Wikimedia</a></span>
</figcaption>
</figure>
<p>The issue raises awkward questions about the inclusion of women in the history of science, not to mention how the UK and other countries choose who appears on their money. Somerville, whose selection followed a <a href="http://www.dailymail.co.uk/news/article-2411015/Caroline-Criado-Perez-women-banknotes-campaigner-reveals-MOTHER-threats-internet-trolls.html">campaign last year</a> to have more women on bank notes, was the author of a pair of influential books in the 1830s that introduced the latest research in the physical sciences to a wider audience. </p>
<p>It is hard to argue that her achievement is greater than that of Telford, who rose from shepherd’s son to president of the Institute of Civil Engineers, whose canals, bridges, roads and harbours across the British Isles are still used to this day. And Maxwell developed no less than the theory of electromagnetism, a vital contribution to physics and a precursor of everything from Einstein to the new <a href="https://theconversation.com/gravitational-waves-found-the-inside-story-54589">discovery of</a> gravitational waves. </p>
<p>The trouble is that no woman in that period could have matched the scientific achievements of these men. If you want to choose a Scottish woman of historic importance, you either have to go for someone like Somerville or maybe one of the first university graduates such as Elizabeth Georgeson, the first from engineering in 1919. You can’t choose a woman from that era without drawing attention to the way in which they were seen as having no place in the likes of science and higher education. It is a certainly an argument for broadening our commemorative choices beyond the sciences – and not the only one, as we shall see. </p>
<h2>The safety of science</h2>
<p>You have to ask why RBS was looking to commemorate achievement in “science and innovation” in the first place. It is a surprisingly common theme on bank notes in Britain and elsewhere. While the notes of the US proudly carry portraits of (male) presidents and prime ministers, Britain has tended to avoid politicians – which will actually make Winston Churchill’s <a href="http://www.bankofengland.co.uk/banknotes/Pages/characters/churchill.aspx">imminent arrival</a> something of a novelty on the Bank of England £5 note, on the flip side from the Queen. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=336&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=336&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=336&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111298/original/image-20160212-29188-1bne91s.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Stand by for Winston.</span>
</figcaption>
</figure>
<p>Politicians tend to be a divisive choice, so avoiding them makes a lot of sense. There’s a reason why the euro notes have bridges on them. Scientists seem to be placed in the same uncontroversial category (which displays a certain amount of ignorance of the history of science, but that’s another story). We celebrate historical science figures for their intellectual achievements, while simultaneously proclaiming a proud national tradition of science and innovation that is so beloved of modern governments.</p>
<p>The Canadian bank notes are particularly clear in their determination to “celebrate Canada’s spirit of innovation”: their backs showcase space-station robotics, the railway through the Rockies, and ice-breaking research ships. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=345&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=345&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111300/original/image-20160212-29202-15eps4c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=345&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Canadian space commemoration.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bankofcanada/8694157272/in/photolist-efgQ4j-9NEdXe-9NDZCz-McRqQ-9NJAiA-9LPBnH-9NvF6h-JtQLg-9Nvxqd-9NDgMs-aTxroz-9NFmxc-s9bRqe-4CuGTo-reNpWV-meRpUw-ayEqYr-96jgb4-brHASF-dZmzCN-dZfNYe-9Nv8dj-gYG2Dv-dZfTkV-6b7NJJ-dZfGCt-dZmcku-9dsPvL-8zL1Mk-57LtSb-8zP9W7-dZfMu4-dZfUQX-7PJLgZ-8zL1Ut-t5RXd-6b3MDP-6b7TzY-5AkQtD-6b7waw-fupbL9-i628ra-76yNfC-6b7Wi9-6b7TXW-6b3HtB-6b3Mdn-6b7Jxq-repno9-6b7wC9">Bank of Canada</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The British science celebration is slightly more muted, but nonetheless clear. Bank of England notes currently feature <a href="http://www.bbc.co.uk/timelines/zq8gcdm">Charles Darwin</a> and the steam-engine developers <a href="http://www.bbc.co.uk/history/historic_figures/watt_james.shtml">James Watt</a> and <a href="http://spartacus-educational.com/SCboulton.htm">Matthew Boulton</a> (see lead image), while past issues have celebrated <a href="https://www.newton.ac.uk/about/isaac-newton/life">Isaac Newton</a>, <a href="http://www.bbc.co.uk/history/historic_figures/faraday_michael.shtml">Michael Faraday</a> and railway engineer <a href="http://www.bbc.co.uk/schools/primaryhistory/famouspeople/george_stephenson/">George Stephenson</a>. The Clydesdale Bank currently has <a href="http://www.bbc.co.uk/history/historic_figures/fleming_alexander.shtml">Alexander Fleming</a>, of penicillin fame, and used to have the physicist and engineer <a href="http://digital.nls.uk/scientists/biographies/lord-kelvin/">William Thomson</a> (Lord Kelvin). In this context, it is hardly surprising that RBS decided to feature science on its new £10 note.</p>
<h2>Ask Australia</h2>
<p>But science is not the only thing that Britain should be proud of. It ignores the wealth of activities that have contributed to the nation’s heritage and to its current standing in the world, from sport to education, and it limits the opportunities to promote other political points. The Australians have women from various fields on their bank notes – the businesswoman and ex-convict <a href="http://adb.anu.edu.au/biography/reibey-mary-2583">Mary Reibey</a>; the politician <a href="http://www.australiangeographic.com.au/blogs/on-this-day/2011/08/on-this-day-australias-first-female-politician-born/">Edith Cowan</a>; and the opera singer <a href="http://adb.anu.edu.au/biography/melba-dame-nellie-7551">Nellie Melba</a>. And though their $50 note features inventor and science communicator <a href="http://adb.anu.edu.au/biography/unaipon-david-8898">David Unaipon</a>, the fact that he was an Aborigine makes its own point. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111301/original/image-20160212-29185-1ods3h7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">G'day.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/hyperbolation/4373329757/in/photolist-7Esszc-fcgQvz-fcvNFh-ynXdwA-fcweAo-pBqB4P-qy1Voa-q3W68A-qgLHFn-fcgwTX-fcgHMF-q3N4gt">Kara Brugman</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>To be fair to the British, there are some exceptions. The Bank of England and Scotland’s Clydesdale Bank do celebrate philanthropy and good works (prison reformer <a href="http://www.bbc.co.uk/schools/primaryhistory/famouspeople/elizabeth_fry/">Elizabeth Fry</a> for the Bank of England; missionary <a href="http://maryslessor.org/mary-slessor/">Mary Slessor</a>, and nurse <a href="http://www.educationscotland.gov.uk/scotlandshistory/20thand21stcenturies/elsieinglis/index.asp">Elsie Inglis</a> for Clydesdale); and authorship (Clydesdale carries <a href="http://www.scottishpoetrylibrary.org.uk/poetry/poets/robert-burns">Robert Burns</a> and the Bank of England carries <a href="http://www.bbc.co.uk/history/historic_figures/dickens_charles.shtml">Charles Dickens</a> and soon <a href="http://www.bbc.co.uk/news/business-23424289">Jane Austen</a>). These choices are undoubtedly better than the well worn politicians, kings and military leaders who adorn our Victorian civic spaces. But there’s so much more to celebrate about human and national achievement – and plenty contemporary social causes to champion, if that is what RBS wishes to do. The Chariots of Fire athlete <a href="http://www.bbc.co.uk/scotland/sportscotland/asportingnation/article/0019/print.shtml">Eric Liddell</a> might be one choice; the percussionist <a href="https://www.evelyn.co.uk">Evelyn Glennie</a> might eventually be another. </p>
<p>What we need from our banks is a clear vision for a series of notes that will together represent both men and women, a fuller range of human activity – and perhaps even some parts of history other than the late 18th and 19th centuries.</p><img src="https://counter.theconversation.com/content/54619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aileen Fyfe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The British do love a scientist on their money, as RBS’s new choice of Mary Somerville for the £10 confirms. Is it time we thought out of the box?Aileen Fyfe, Reader in Modern British History, University of St AndrewsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/530592016-01-13T15:03:07Z2016-01-13T15:03:07ZTo avoid a 2016 crash, the major powers need to pull in the same direction<figure><img src="https://images.theconversation.com/files/107921/original/image-20160112-6981-k0r05b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'Heave away boys ...'</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/s/tug+of+war+pull/search.html?page=3&thumb_size=mosaic&inline=248863414">PHOTOCREO/Michal Bednarek</a></span></figcaption></figure><p>It looks already as if 2016 will be a pivotal year for the world economy. RBS has <a href="http://www.theguardian.com/business/2016/jan/12/sell-everything-ahead-of-stock-market-crash-say-rbs-economists">advised investors</a> to “sell everything except for high-quality bonds” as turmoil has returned to stock markets. The <a href="http://www.bbc.co.uk/news/business/market_data/stockmarket/2/one_month.stm">Dow Jones</a> and <a href="https://www.google.co.uk/finance?q=INDEXSP%3A.INX&ei=J_GUVvDvFIWaUL6Ro6AG">S&P</a> indices have fallen by more than 6% since the start of the year, which is the worst ever yearly start. There is a similar story in other major markets, with the <a href="http://www.bbc.co.uk/news/business/market_data/overview/">FTSE leading companies</a> losing some £72bn of value in the same period. </p>
<p>These declines have come on the back of a <a href="http://www.channelnewsasia.com/news/business/china-s-stock-market/2415474.html">major shock</a> to the Chinese stock market. China’s stock exchange is very different from that of other major economies, as Chinese companies don’t rely on it to fund themselves to the same extent, using debt instead. All the same, the repeated suspensions of trading as the Chinese circuit-breakers came into operation (as they do when share prices fall too sharply) spooked investors around the world. </p>
<p>On top of that we are seeing commodity prices continuing to retreat. Oil prices have <a href="http://www.bbc.co.uk/news/business/market_data/commodities/default.stm">dropped towards</a> $30 per barrel and don’t look likely to increase soon, with Iranian and Saudi oil production continuing to sustain supply. We are seeing many emerging economies dependent on petroleum revenues suffering (Brazil, Russia), and there is speculation that many oil producers (and perhaps even Saudi Arabia) are <a href="http://www.ft.com/cms/s/3/c894ddb8-b538-11e5-8358-9a82b43f6b2f.html#axzz3wrq0fExZ">having to abandon</a> their currencies’ link with the US dollar. </p>
<h2>Demand and supply</h2>
<p>There are basically two different perspectives on why the world economy is <a href="http://www.theguardian.com/business/2015/oct/06/imf-warns-stagnation-threat-g7-economies">still struggling</a> eight years after the financial crisis. <a href="http://uk.businessinsider.com/larry-summers-imf-speech-on-the-zero-lower-bound-2013-11?r=US&IR=T">The first</a> suggests it is suffering from too little global demand following the financial crisis. The argument is that in the world economy as a whole, consumer spending and corporate investment have been held back by a lack of confidence. This has been aggravated by austerity in many of the advanced economies in the western hemisphere after the <a href="http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp?header_alt=g">financial crisis</a> caused government debt to spiral. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=632&fit=crop&dpr=1 600w, https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=632&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=632&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=795&fit=crop&dpr=1 754w, https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=795&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/107922/original/image-20160112-6977-1gn1u1q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=795&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Confidence conundrum.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=ghAIaGdnJ_PLRXE1s7Ov_A&searchterm=lack%20confidence&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=205795234">kmlmtz66</a></span>
</figcaption>
</figure>
<p>According to <a href="http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf">this view</a> of the world, monetary policy can’t encourage demand to pick up when interest rates are already at or close to 0%. A recovery will not be seen unless governments restore confidence through co-ordinated fiscal action – ramping up public spending worldwide. This is a basically <a href="http://www.investopedia.com/terms/k/keynesianeconomics.asp">Keynesian demand-side view</a> of the world, echoing Keynes’ view that the post-war global economy required to be managed in terms of overall levels of demand. </p>
<p>An <a href="http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/01-why-interest-rates-low-global-savings-glut">alternative view</a> is that the world’s economic stagnation has been caused by an expansion of global savings, partly driven by the emergence of major economies such as China and India. Because business demand for investment capital has been weak, these excess savings have instead gone into things like government bonds, leading to low real interest rates. </p>
<p>In this world view, emerging from the crisis does not require more government spending, but an expansion in investment opportunities for the excess savings, driven by innovation. It also requires a degree of policy co-ordination between countries to gradually raise central-bank interest rates towards “normal” levels. Otherwise the imbalances in savings between East and West are likely to continue, raising the risk of recreating the bubbles in asset prices such as property, and excessive consumer spending in the industrialised countries. </p>
<h2>Imperfect reality</h2>
<p>As 2016 evolves we should get some insight into which of these two world views is correct as we begin to see if consumer and investment spending can recover without the need for additional government spending. In my view the demand-side argument has greater merits, but there are three qualifications. First, to sustain consumer demand in any recovery, wage levels have to keep pace with inflation. If this doesn’t happen it will continue to drive inequality and hold back consumer spending. </p>
<p>Second, there is the complication that post-crisis debt levels are <a href="http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging">still high</a> in many countries. Household debt is still high relative to GDP in the UK, Spain, Portugal, Ireland, Canada and the US (amounting to between 80% and 110% of the size of the economy). And gross government debt as a proportion of the economy exceeds 100% in the US, Ireland, Italy, Greece, Belgium, Portugal and Japan. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/107923/original/image-20160112-6988-226rle.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Can the debt be reset?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=Rf5IM0iieAh7ZlUi1mX9dA&searchterm=global%20debt&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=200540204">pognici</a></span>
</figcaption>
</figure>
<p>Critics of the pure Keynesian position <a href="http://www.reinhartandrogoff.com">argue that</a> unless these debt levels are brought down, it is difficult to see beyond a slow recovery. In the past, wars and inflation have been used as opportunities to restructure or inflate away debt. Our independent central banks make it difficult to use inflation as a way of reducing debt levels because we have given them the job of keeping inflation low. This does not prevent a co-ordinated fiscal expansion amongst the G20 economies to kick-start the world economy, but it does mean that we have a diminished arsenal at our disposal. </p>
<p>Third, the US was able to use its dominant position to set a clear direction for the world economy until recently, which made life easier for governments and central banks around the world. In a multi-polar world where countries set their own fiscal and monetary policies, there is the greater potential for individual countries to make policy mistakes as they (mis)interpret what is happening externally. </p>
<p>It would be good if, in 2016, we began to see greater macroeconomic cooperation between the G20. In an ideal world, the G20 economies would seek to share out the effort of sustaining world demand through targeted public investments designed to restore business and consumer confidence. We <a href="https://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf">saw this</a> very briefly immediately after the financial crisis. Since 2009 there have been no attempts to act collectively on fiscal policy. Those days seem unfortunately very distant now.</p><img src="https://counter.theconversation.com/content/53059/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anton Muscatelli does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With the economic dashboard flashing red, here’s the route to safety.Anton Muscatelli, Principal and Vice Chancellor, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/429542015-06-11T13:11:06Z2015-06-11T13:11:06ZWhy the UK government is willing to take a loss on RBS<p>The UK government plans to sell its 80% stake in the Royal Bank of Scotland the chancellor, George Osborne, <a href="http://www.bbc.co.uk/news/business-33088599">announced</a> at his annual Mansion House speech to financiers in the City of London. Based on the current value of RBS shares, selling now would constitute more than a <a href="http://www.ft.com/cms/s/0/05becfd6-0f90-11e5-b968-00144feabdc0.html#axzz3clH6cOEF">£7 billion loss</a>. But, ultimately, RBS is better off out of government hands and the decision to sell is the best option available to it.</p>
<p>When the government bought the bulk of RBS in 2008, it invested £45 billion to stave off bankruptcy and recapitalise the bank. Shareholders took substantial losses, but were fortunate that it did not default or they would have lost everything. This was important as it prevented other potential cases and systemic risk was averted. But the cost was a large commitment and loss on the holding as the RBS share price fell further.</p>
<p>This was due to further bad news from subprime mis-selling and the market fixing that followed – the losses and fines from these made it even harder for the share price recovery that was necessary to recoup the government’s investment. The losses and fines imposed by regulators are now quantifiable but have been counterproductive to recovery since they reduced the RBS equity base at a time when its need for capital had increased – further punishing the main shareholder, the government itself. </p>
<p>It’s important to note that the loss the government currently faces is currently unrealised, though the announcement of plans to sell will start to crystallise it. RBS shares may <a href="http://uk.reuters.com/article/2015/06/11/uk-rbs-sale-stocks-idUKKBN0OR0O320150611">rise</a> on this news but after the sale commences future rises will not benefit the taxpayer.</p>
<h2>So why sell?</h2>
<p>Bank profits are derived from deals and lending transactions that entail considerable managerial effort and corporate risk. Unfortunately both require significant incentives for managerial teams and without bonuses or remuneration that are tied to transactions, <a href="http://news.efinancialcareers.com/uk-en/201872/join-rbss-investment-bank-now/">the flow of deals will dry up</a> along with profits.</p>
<p>The coalition government could not stomach paying these bonuses but the bank’s profit and valuation cannot increase without a change in incentives. Stephen Hester, CEO of RBS from 2008 to 2013, <a href="http://www.bbc.co.uk/news/business-22883800">struggled with the politics of this policy</a> during his years. In this sense, banks and their profits are more controlled by their workers than shareholders who bear the risk. As such, the government is better off not trying to control the day-to-day running and consequent value of the bank.</p>
<p>The government could have wound RBS up without default, but this was also deemed unacceptable. After downscaling it has regained some value, even if not enough to return the initial investment. Another alternative would be to break the bank up and sell its different units off or <a href="http://www.neweconomics.org/publications/entry/reforming-rbs">transfer ownership to local stakeholders</a>. </p>
<p>This raises the question of what objective the government should set itself – private value or maximising public welfare. Framed narrowly, a focus on the RBS-specific loss ignores the fact that it is part of a wider bailout programme. When considered as part of the government’s return from bank bailouts as a whole, the RBS sale can be seen to crystallise a <a href="http://citywire.co.uk/money/osborne-were-7bn-down-on-rbs-14bn-up-on-banks/a820012">net gain of £14 billion</a>.</p>
<p>The banking sector is undergoing many other changes. If the government maintained its RBS holding, it might be less able to encourage other forms of lending (<a href="https://theconversation.com/could-peer-to-peer-lending-challenge-our-banks-7585">such as peer-to-peer</a>). So the future shape of RBS will be left to the mergers and acquisitions market, even though these are the activities that made RBS vulnerable in the first place. Nonetheless, free-market forces are still the best means to determine its future structure and therefore its worth. And few are arguing for relinquishing controls on this activity in the future – only on increasing future scrutiny.</p>
<h2>Timing</h2>
<p>Aiming to recoup the bail-out money in full was the pre-election position of both Labour and the Conservatives, but only because it was unlikely to be achieved in either parliament. The same is true of this term, but ironically starting to remove the bind over its control is a key step in creating more RBS value. </p>
<p>The government’s decision to sell its stake in RBS will level the playing field against banks that were not bailed out. It will also free up the processes of reforming banking regulation and issues such as where banks should locate their capital base, for example <a href="https://theconversation.com/instead-of-laying-off-thousands-of-staff-hsbc-should-focus-on-becoming-a-model-bank-43024">HSBC</a>. Selling such a large stake always had the potential for a negative price impact.</p>
<h2>Still too big to fail?</h2>
<p>The final issue that will remain after sale is, what are the chances of ending up here again? Can the government credibly commit to letting it default in the future, or are banks still “too big to fail”? </p>
<p>In this respect things are changing <a href="http://www.businessinsider.com/the-governments-too-big-to-fail-list-is-going-to-change-2015-6?IR=T">in the US</a> and the <a href="http://www.bbc.co.uk/news/business-33085349">governor of the Bank of England</a> spoke last night about making investment banking culture more accountable for its mistakes. We will have to hope that after the sale is completed – when RBS is back under risk-taking management – its chances of survival for future years remain high or that provision for another bail-out is credibly withdrawn. Either way, this <a href="http://www.bbc.co.uk/news/business-15792873">sell-off</a> is for professional, not private investors.</p>
<p><em>Now read this: <a href="https://theconversation.com/rbs-sell-off-is-a-missed-opportunity-and-must-be-a-rallying-point-for-protest-42949">RBS sell off is a missed opportunity</a></em></p><img src="https://counter.theconversation.com/content/42954/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ultimately, RBS is better off out of government hands and the decision to sell is the best option available.Mark Shackleton, Professor of Finance, Associate Dean Postgraduate Studies, Lancaster UniversityKim Kaivanto, Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/429492015-06-09T05:15:12Z2015-06-09T05:15:12ZRBS sell off is a missed opportunity – and must be a rallying point for protest<figure><img src="https://images.theconversation.com/files/84198/original/image-20150608-8706-vd9ul.jpg?ixlib=rb-1.1.0&rect=93%2C104%2C998%2C655&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Emblem of the crisis; emblem for discontent?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/neutronboy/6983247551/in/photolist-bD5YcR-FfH1R-4CUx2g-8uA1So-aAH7rd-s1VThq-8MyEe1-7CJFBW-7mXimG-9cNfcZ-rfnwHQ-KEJt6-7CJwWL-nqqFeE-FfH1V-8rSy6K-6bRbcT-8X6RhR-8rSyh2-4EUNJ6-4KvWMB-rHMXiD-bZ7C3b-7CJDNg-7iqF4t-8ux1Ba-6bVjYA-6bVkcW-6UEhAJ-e4xcZ-mzJ8p-Pz5Ry-8Pomnt-8tv98v-iZ1xA1-6c4CeW-6bZtDe-685ySt-6bZruX-6c4Cwh-6c3wJ3-os2umn-axVcDt-6bZrz8-6bZrd2-9fTFiE-bYNqM7-6Y1215-911wiF-6cvYyM">Mark Ramsay</a></span></figcaption></figure><p>Financial power brokers are invited by the Lord Mayor of the City of London to an annual dinner where they can hear the chancellor of the exchequer give a speech on the state of the UK economy. The Mansion House Speech is where the political elite reassure the financial elite that all is well with the economy over a lavish meal. </p>
<p>This year, George Osborne is expected to announce an <a href="http://on.ft.com/1Gpk8DG">end to banker bashing</a>, with a commitment to a <a href="http://www.thesundaytimes.co.uk/sto/business/Finance/article1565423.ece">review of the bank levy</a> and a package of public assets for sale. The biggest controversy is likely to be the sale of the remaining Royal Bank of Scotland (RBS) shares, <a href="http://uk.businessinsider.com/llodys-royal-bank-of-scotland-government-share-sale-loss-2015-5">at an anticipated loss of £13 billion</a>. What better time and place to make this announcement than when surrounded by very financial power brokers that will package-up, underwrite, buy and resell these shares. </p>
<p>The chancellor needs a positive press to sell RBS because <a href="http://www.heraldscotland.com/business/company-news/lawsuit-threatens-to-spoil-osbornes-rbs-share-sale-celebrations.128168613">leading investors appear to baulk</a> at buying shares in the state-rescued bank. Not least because RBS is still mired in <a href="http://www.independent.co.uk/news/business/news/rbs-could-fail-due-to-100bn-black-hole--with-british-taxpayers-in-line-to-lose-their-entire-45bn-stake-9466823.html">numerous scandals</a>: from the mis-selling of payment protection insurance to customers, the alleged <a href="http://www.heraldscotland.com/business/company-news/lawsuit-threatens-to-spoil-osbornes-rbs-share-sale-celebrations.128168613">mis-selling of shares</a> (a total of £12 billion) to investors just before the bank collapsed in 2008, <a href="https://theconversation.com/uk/topics/libor">the Libor scandal</a>, to current criminal investigations into the <a href="https://theconversation.com/if-you-aint-cheating-you-aint-trying-how-forex-has-changed-42198">manipulation of foreign exchange markets</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84202/original/image-20150608-8736-ylynfp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">High visibility. Low ambition?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/number10gov/13980759924/in/photolist-nir3QU-ni7sL4-nir3hE-n35Pdn-n37hwE-mEkqjv-mEneju-mEkpuz-mEkp3c-mEkHJi-mEkHjF-mEnbW3-mEkmZK-mEkFTV-mEkm5D-mEna5N-mEn9xW-mEkjAM-mEn8vq-mEn7To-mEn7hd-mEkBSZ-ni7qLU-mC2BQd-mg4tva-mg6q4A-mfaNE5-m73Myv-kzd7G6-ksEeYc-kqiE1o-kheegD-khedig-khdugH-khfVRf-kfsFP4-jYQKna-jNn5BB-jDk173-jDiNBv-jDjYxG-jC4hDE-jzngwo-jonjpU-jom8Nd-jom8Mm-jokzF6-joj6wp-jokyXH-jonijh">Number 10</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Failed model</h2>
<p>RBS has become the standard bearer of the failed corporate governance of financial institutions that caused the 2008 crisis. <a href="http://www.amazon.co.uk/Shredded-Inside-Bank-Broke-Britain/dp/1780271387">Ian Fraser’s bestseller Shredded</a> offers an investigative journalist’s account of how politicians, central bankers, regulators and the Basel Committee on Banking Supervision allowed RBS to get away with virtually anything, “whilst defying financial gravity and existing above the law”.</p>
<p>Let’s remember the direct costs of the initial bail-out is conservatively <a href="http://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/">estimated by the National Audit Office</a> at £1.3 trillion, a figure which does not even include indirect and associated costs of the wider financial crisis to the rest of the UK economy. The bail-out of Lloyds and RBS was paid for by HM Treasury and managed by a quango UK Financial Investments (UKFI), now renamed UK Government Investments (UKGI). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84212/original/image-20150608-8674-1ggp4lb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bailed out. Taxpayer cash came to the rescue.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/59937401@N07/5474156007/in/photolist-9kJtS8-nqerw3-5YnaLq-dgvXN5-9VDkGC-8yWpHK-8yWpYv-gb7jCe-nqegmH-nGGgy1-nqegpi-nqesw9-8SuvYA-9kJFV4-9kJG3z-9kJvsx-fmZrwZ-dmpRcQ-dmpNfK-dmpR8Q-dmpR6W-8yZuYY-ihdYUi-9i29LN-p6mp4o-9VzJ8p-6Vem1s-p689QZ-gz3xco-Kzbc9-9gTbL3-9VDmuA-6u6cs1-KzfYi-9VDoNo-bmfSq-iEQZnR-iEQZEp-iES4XD-9VzihB-471Lfv-8xnLj1-niQatg-aByz3R-eejztc-kn2aV4-8tHQUr-iUpbJ-9VzeFx-bA34Pr">Images Money</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Accepting a £13 billion loss to reprivatise RBS reveals the Conservative government’s political commitment to ending public ownership of banking assets. However, there is no let up in the taxpayer guarantee of the financial system:</p>
<blockquote>
<p>The Treasury <a href="http://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/">retains the unquantifiable ultimate risk</a> of supporting banks should they threaten the stability of the overall financial system again. </p>
</blockquote>
<h2>Policy proposals</h2>
<p>It is clear the Conservative government is firmly committed to the continue privatisation of gains and socialisation of losses for the financial services industry.</p>
<p>This commitment becomes obvious when we compare recent alternative proposals of turning RBS into a public utility bank. The New Economics Foundation proposed turning RBS <a href="http://b.3cdn.net/nefoundation/141039750996d1298f_5km6y1sip.pdf">into a local stakeholder banking network</a>; Labour’s election manifesto <a href="http://www.labour.org.uk/page/-/BritainCanBeBetter-TheLabourPartyManifesto2015.pdf">proposed the British Investment Bank</a> to support credit unions and mutual across the UK; the Green Party proposed turning RBS <a href="https://www.greenparty.org.uk/assets/files/manifesto/Green_Party_2015_General_Election_Manifesto_Searchable.pdf">into a People’s Bank</a> offering basic banking services to all citizens and direct funding for small and medium-size enterprises. With RBS out of public hands all alternative visions for reforming the banking sector are moot.</p>
<p>In the context of continued austerity, selling the taxpayer-owned bank at knockdown prices knowing it will likely generate a massive loss is creating new forms of opposition. Not least because that loss estimate of £13 billion is the equivalent to the total amount of proposed cuts to public spending on top of the additional £12 billion in proposed cuts to welfare budget, which will hit the poorest and most vulnerable in British society. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84216/original/image-20150608-8704-1nb3c6s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Cutting to the chase. Mervyn King.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/imfphoto/8655576649/in/photolist-62xAQ4-5AQPMk-97y6tu-ebXKzo-97y5t9-ebS6oa-22Kkzu-22ETHt-74o6t6-22Knf5-9hoyA7-9hoyCQ-9hkrpD-ddDtNy-ebS7FB-ebXLUG-ebXKxf-ebXKxb-ebS6op-ebS7Fc-ebXLT1-ebS7Fr-ebS7Gi-8avS1r-dH7jZF-6Fcrgy-rv63E3-dKehvh-aQr1n-cniLys-6F8jJX-6v9erh-6v3LzF-9yQLAR-9TZ2AW-9yNUVi-74tGWu-74ZNNt">International Monetary Fund</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Echoing the former governor of the Bank of England, Mervyn King, <a href="http://www.theguardian.com/business/2011/mar/01/mervyn-king-blames-banks-cuts">in his testimony before MPs</a> in 2011: </p>
<blockquote>
<p>The price of this financial crisis is being borne by people who absolutely did not cause it… Now is the period when the cost is being paid, I’m surprised that the degree of public anger has not been greater than it has.</p>
</blockquote>
<p>Already a coalition of civil society groups – Move Your Money, the New Economics Foundation and Sum of Us – <a href="http://www.neweconomics.org/blog/entry/stop-the-fire-sale-of-rbs">have launched a petition</a> demanding Osborne abandon the RBS fire-sale and pursue other alternatives. This could signal a useful change in the political opposition to austerity. </p>
<p>Previously, discontent has focused on broad issues and large-scale protest, but RBS sell-off creates a new rallying point. Here is a moment, perhaps, where the effectiveness of a targeted anti-austerity movement can be tested against the entrenched political power of the financial services sector in the UK.</p>
<p><em>Now read this: <a href="https://theconversation.com/why-the-uk-government-is-willing-to-take-a-loss-on-rbs-42954">Why the government is willing to take a loss on RBS</a></em></p><img src="https://counter.theconversation.com/content/42949/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Johnna Montgomerie receives funding from Economic and Social Research Council (ESRC).</span></em></p><p class="fine-print"><em><span>Joel Benjamin receives funding from Economic and Social Research Council (ERSC) and is a campaigner with Move Your Money UK, which has previously received grant funding from the Barrow Cadbury Trust, Joseph Rowntree Foundation and nef.</span></em></p>The stricken bank offered a chance to remodel how we think about banking in Britain. Instead it should now provide a focus for anti-austerity protests.Johnna Montgomerie, Lecturer in Economics, Goldsmiths, University of LondonJoel Benjamin, Research Assistant at the Political Economy Research Centre, Goldsmiths, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/384502015-03-05T16:37:58Z2015-03-05T16:37:58ZHow breaking up RBS would help rebalance the UK economy<figure><img src="https://images.theconversation.com/files/73944/original/image-20150305-3321-9rwjnj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Rewarding Blooming Shareholders!</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/divinenephron/5479333274/in/photolist-iZ1xA1-oZZLan-8MyEe1-p8ac7j-64fkJt-fpYp9T-6bZpBR-8X6RhR-685Lv3-bD5YcR-9m8Wra-9mcgku-9m8WVp-9mcgdq-9m8WxP-9mc2k3-9m9fPT-9mc1Tm-9m9bnT-9mckxh-os2umn-9MZJ5E-8Pomnt-9MWYSP-9N85S7-9N148s-9N5ikv-9MZV21-6UEhAJ-6bRbcT-7iqF4t-6bVkcW-6bVjYA-6bQby5-4EUNJ6-6XNejJ-66V35z-6m1oD5-6m1oJQ-9N5iP2-7mXimG-bQpbia-9MZLaQ-9MX6Pg-7AXVw5-9MXfKZ-9Pkfpm-9MXk62-9MXdUi-bZ7C3b">Devon Buchanan</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Ever since the financial crisis began in 2007-08, there has been much debate around the responsibilities of mainstream banks – should they serve shareholders or stakeholders? What is their mission? Do they have a responsibility towards local communities? </p>
<p>What most of us can agree on is that banks should provide access to appropriate, affordable financial products and services. But first they have to regain customers’ trust after numerous mis-selling scandals such as <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11217168/The-PPI-scandal-is-showing-no-signs-of-coming-to-an-end.html">payment protection insurance</a>. </p>
<p>They are trying to market themselves as standing for fair, responsible banking <a href="http://www.campaignlive.co.uk/news/1316030/">for example</a>, “Goodbye unfair banking. Hello Natwest”. Some <a href="http://www.ft.com/cms/s/0/9d6f9a7c-5519-11e4-b616-00144feab7de.html">have agreed to</a> make their lending decisions more transparent and accountable by disclosing how much they are lending consumers and small businesses. Yet many are also <a href="http://www.ft.com/cms/s/0/5ea06dae-5adb-11e4-8625-00144feab7de.html#axzz3TW3vSCTt">continuing to</a> close high-street branches, moving away from providing local face-to-face services.</p>
<h2>The NEF model</h2>
<p>In this context, the New Economics Foundation (NEF) <a href="http://www.neweconomics.org/publications/entry/reforming-rbs">has published a report</a>, arguing that the 81%-state-owned RBS could have a greater benefit to local economies and communities if it was split into 130 local banks across the UK. Instead of being <a href="http://uk.reuters.com/article/2014/07/26/uk-rbs-results-idUKKBN0FU0G020140726">returned to</a> its old listed model in the private sector, these smaller banks would follow a <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210441/bis-13-939-moving-to-employee-ownership-guide-for-employees.pdf">public benefit trust model</a> akin to the retailer John Lewis. </p>
<p>The NEF’s rationale is that this would give consumers access to better products and services by promoting more competition between the banks and creating an alternative business model. It would also revitalise local economies by providing credit to small business and consumers that have been unable to access it affordably since the start of the financial crisis. </p>
<p>By restructuring RBS into the likes of the Royal Bank of Cornwall and Bank of Birmingham, the NEF suggests that the economy could be rebalanced away from the City of London, thereby promoting greater job security and economic resilience. The government would benefit through increased taxation and fewer social-security payments, it argues.</p>
<p>The vision is that these institutions would balance social and economic objectives – as opposed to purely profit-driven banks with supposedly little benefit to local economies. Any surpluses would be reinvested back into lending. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=527&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=527&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73945/original/image-20150305-3306-wlcd8j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=527&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Royal Bank of Cornwall, anyone?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/divinenephron/5479333274/in/photolist-iZ1xA1-oZZLan-8MyEe1-p8ac7j-64fkJt-fpYp9T-6bZpBR-8X6RhR-685Lv3-bD5YcR-9m8Wra-9mcgku-9m8WVp-9mcgdq-9m8WxP-9mc2k3-9m9fPT-9mc1Tm-9m9bnT-9mckxh-os2umn-9MZJ5E-8Pomnt-9MWYSP-9N85S7-9N148s-9N5ikv-9MZV21-6UEhAJ-6bRbcT-7iqF4t-6bVkcW-6bVjYA-6bQby5-4EUNJ6-6XNejJ-66V35z-6m1oD5-6m1oJQ-9N5iP2-7mXimG-bQpbia-9MZLaQ-9MX6Pg-7AXVw5-9MXfKZ-9Pkfpm-9MXk62-9MXdUi-bZ7C3b">blambca</a></span>
</figcaption>
</figure>
<h2>The network dimension</h2>
<p>The banks would be organised into a national network, which would spread risk to the same extent as the other high-street banks through a system of mutual guarantees. The banks in the network would then reduce their costs and further cut financial risks by sharing back-office systems. </p>
<p>Drawing on the value of local relationship knowledge to inform lending seen in the likes of credit unions and stakeholder banks, the NEF suggests that the local banks would use this alongside the centralised credit scoring that high-street banks rely on. </p>
<p>The foundation may be ignoring other tensions between a centralised network and local operations that need pointing out, though. Staff would need training in an approach that was less dependent on credit scoring. This would take time to institute effectively. There is also the problem that relationship lending is expensive. The losses that the high-street banks incurred drove them towards using centralised credit scoring to manage risk in the first place. </p>
<h2>Financial inclusion</h2>
<p>If RBS were to be restructured into local banks in this way, they would play an important role in providing financially inclusive products and services. But unlike what NEF implies, this is not just about providing access to local branches and rectifying the fact that some parts of the country <a href="http://eprints.nottingham.ac.uk/2199/1/ChangingGeographyofBritishBank%26BuildingSocBranchNetworks2003-2012_FINAL.pdf">are far better served</a> than others. </p>
<p>It is about inability to access finance and banks <a href="http://www.amazon.co.uk/Confronting-bank-redlining-challenge-institutionalized/dp/B00071P4IU">“redlining” areas</a> within which they will not lend. It is about the conditions they attach to financial products, such as offering “free” travel insurance only to those who deposit over £750 per month into their bank account. Other problems include the affordability of their products and services, and self-exclusion, where people who don’t think they will be able to access products don’t apply. </p>
<p>Financial inclusion does entail a greater range of products and services and hence higher costs. But this would be offset against the economies of scale that come from being in a banking network, as well as through partnerships with other organisations such as credit unions and <a href="http://www.cdfa.org.uk/about-cdfis/what-is-a-cdfi/">community development finance institutions</a> to share best practice and ensure that if the bank is unable to help they are referred to other institutions that may be able to do so. </p>
<p>In short, the financial crisis has reminded us that banks have a responsibility to provide appropriate, affordable products and services for consumers and enterprises in a transparent way. Though there are definitely potential pitfalls around the cost of relationship lending and proper financial inclusion, restructuring RBS into a network of local banks would be a powerful way of reforming retail banking in a way that helps meet social goals and promotes growth away from the South East. If George Osborne implemented these NEF recommendations, it would be a radical and welcome move.</p><img src="https://counter.theconversation.com/content/38450/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey has received funding from the Archbishop’s Task Group on Responsible Lending, the Arts and Humanities Research Council, the Friends Provident Foundation, the Joseph Rowntree Foundation and Economic and Social Research Council</span></em></p>The New Economics Foundation’s proposal to break up RBS might seem radical, but it would make a world of difference to banking.Lindsey Appleyard, Research Fellow for the Centre for Household Assets and Savings Management (CHASM), University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/197882013-11-01T15:34:49Z2013-11-01T15:34:49ZTime for RBS to march carefully to a Scottish tune once again<figure><img src="https://images.theconversation.com/files/34255/original/s6sgttnj-1383318831.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dour but dependable?</span> <span class="attribution"><span class="source">Digidave</span></span></figcaption></figure><p>The chancellor has given away an open secret. The Royal Bank of Scotland (RBS) <a href="http://news.sky.com/story/1162463/rbs-confirms-plan-for-38bn-bad-bank">will not be split up</a>. Instead the bank, still 81% owned by the tax-payer, will be restructured into and a “good bank” and a “bad bank”. This bad bank would remain part of the RBS group. It would hold on its balance sheet the £38 billion of toxic loans which RBS racked up prior to the financial crisis.</p>
<p>This decision has drawn criticism from some. Both Mervyn King, the former governor of the Bank of England, and the parliamentary commission on banking standards were keen on bolder action and <a href="http://www.ft.com/cms/s/0/136b50fe-42c9-11e3-9d3c-00144feabdc0.html#axzz2jOV7fGR4">a radical split</a>. Similarly, investors are also miffed. For instance one senior asset manager <a href="http://www.bbc.co.uk/news/business-24767624">declared it</a> “a dreadful day for RBS as political expediency overrides shareholders’ best interests”.</p>
<p>Avoiding a premature break certainly has some upsides. It will mean senior managers are not distracted with complex restructuring of the bank’s systems. It will also mean that the bank is not sold off for a bargain basement price which would lose the tax payers billions. </p>
<p>Publicly owned banks also tend to be more efficient, and they also force their private sector competitors to be more efficient too. Sadly though, there is <a href="http://theconversation.com/rbs-sale-bad-for-taxpayers-bad-for-banking-14238">little evidence</a> that publicly owned banks are any better at lending to individuals and SMEs.</p>
<h2>Repair work needed</h2>
<p>So RBS has put off the hard work of breaking up. But mending the bank is still going to be a difficult task. </p>
<p>In July, an investigation by the Prudential Regulation Authority (PRA) revealed that the bank needed to increase the amount of capital that it holds on its balance sheet <a href="http://www.bbc.co.uk/news/business-22982311">by £13.6 billion</a>. Other costs include an additional £225m to settle claims for PPI, bringing the <a href="http://www.ibtimes.co.uk/articles/518833/20131101/rbs-mis-selling-ppi-results-ross-mcewan.htm">total paid out to £2.6 billion</a>, and a £390m fine for <a href="http://www.bbc.co.uk/news/business-21348719">manipulating Libor</a>.</p>
<p>All these costly misdemeanours have now been accounted for, but there are some unknown and potentially very expensive charges looming on the horizon, including a <a href="http://www.bbc.co.uk/news/business-24766326">lawsuit</a> being pursued by the US Mortgage agency, Fannie Mae. But perhaps most worrying is the investigation into the Bank’s role in the <a href="http://theconversation.com/bankers-have-no-reason-not-to-fix-currency-rates-19218">manipulation of global currency markets</a>. All this adds up to a huge potential price RBS needs to pay to put its past behind it.</p>
<h2>A fine solution</h2>
<p>Typically, other large banks have just decided to pay a huge price for peace with the regulators. Most famously JP Morgan has set aside US$23 billion to deal with legal challenges it has faced in the past few years. This means it has been spending <a href="http://qz.com/134534/jp-morgan-is-spending-more-on-fines-and-lawyers-than-on-employee-salaries/">more money on lawyers and fines</a> than it spends on its employees salaries. </p>
<p>A large universal bank such as JP Morgan has the luxury of being able to afford such fines. Its investment banking operations continue to be a highly lucrative source of income which can be used to keep the regulators at bay. </p>
<p>But RBS has decided to largely withdraw from investment banking operations in order to focus on the safer, but less profitable, corporate and retail banking areas. The bank can no longer rely on income from its risky operations to fill the regulators (and the public’s) mouths with gold. </p>
<p>This is certainly a reasonable decision as it reduces the bank’s future exposure to the dodgy dealings which some investment banks seem to specialise in. It also means that the bank is focusing its activities back on what it has traditionally been good at. But in doing this, it means it will not have the cash-flow to pay off fines for past misdemeanours.</p>
<h2>Customer focus</h2>
<p>No more investment banking means the safer parts of the bank are likely to come under increased pressure to create returns. But, at the same time, these same operations will be hit by big changes. </p>
<p>The new CEO, Ross McEwan, has decided to focus on <a href="http://hereisthecity.com/en-gb/2013/10/19/ross-mcewan-rbs-chief-reassures-staff-over-future-direction-of-b/?or=1">rebuilding the bank’s customer service</a>. This is vital as a report released today suggests SME customers are <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10418965/RBS-small-business-lending-a-failure-and-needs-overhaul-says-Andrew-Large-report.html">not happy with their service</a> from the bank, and a similar story appears to be true for individual customers. </p>
<p>But this sort of change is going to be tough. McEwan has announced plans to dispose of assets in the US, do some restructuring, develop some new IT systems, and shed some staff. Each of these sources of uncertainty is unlikely to inspire commitment and high levels of customer service from staff.</p>
<p>If the new CEO is serious about refocusing the bank on customer service, it is vital he starts with his own disheartened employees, as research consistently finds that customers tend to like the service from people who are <a href="http://psycnet.apa.org/journals/apl/87/2/268/">satisfied with their jobs</a>. Any organisation that has experienced so much negative press is likely to have disheartened employees.</p>
<p>Adding the significant uncertainty which comes with restructuring and new IT systems is likely to make matters worse. RBS needs to remind its workers why their job is important not just to shareholders, but to the communities they serve. </p>
<p>But simply increasing customer service levels may not get to the root causes which created all these problems in the first place. Many of the problems faced by the bank, ranging from manipulating Libor to mis-selling PPI, have been driven by a culture which emphasised delivering results at any cost. </p>
<p>It is vital this culture is replaced with one which values longer term sustainable performance. Doing this probably involves returning to some of the values which the bank was originally known for, such as prudence. Perhaps great customer service in a bank is dealing with a careful – and perhaps even a little dour – Scottish banker.</p><img src="https://counter.theconversation.com/content/19788/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The chancellor has given away an open secret. The Royal Bank of Scotland (RBS) will not be split up. Instead the bank, still 81% owned by the tax-payer, will be restructured into and a “good bank” and…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/142382013-05-17T13:38:42Z2013-05-17T13:38:42ZRBS sale: bad for taxpayers, bad for banking<figure><img src="https://images.theconversation.com/files/24073/original/fcrt7d4p-1368791852.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">RBS: Not as valuable as it used to be.</span> <span class="attribution"><span class="source">David Cheskin/PA</span></span></figcaption></figure><p>The UK could be about to make a multi-billion pound mistake. </p>
<p>Plans to sell-off the 82% share of the Royal Bank of Scotland (RBS) and the 39% share of Lloyds owned by the taxpayer are gaining favour in both <a href="http://www.guardian.co.uk/business/2013/may/15/david-cameron-rbs-sell-off">Westminister</a> and <a href="http://www.ft.com/cms/s/0/3a44dfde-be48-11e2-9b27-00144feab7de.html#axzz2TY1JD41u">the City</a>. RBS has begun preparations for a sale by announcing <a href="http://www.bbc.co.uk/news/business-22550543">14,000 additional job cuts</a> in an attempt to make itself look more attractive to potential investors.</p>
<p>But is this really a good deal for the UK? The taxpayer stands to lose billions, and evidence suggests the whole financial sector gains from the presence of publicly owned banks. </p>
<p>“Functional stupidity”, the idea that orgnisations make poor decisions due to a <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6486.2012.01072.x/abstract">lack of flexibility and ignorance of contrary evidence</a>, has infected both the government and the banks. This stupidity <a href="http://blog.mayvin.co.uk/post/47014850398/functional-stupidity-more-reasons-why-companies">contributed to the financial crisis in 2008</a>, and it is causing banks and government to ignore the evidence on bank privatisation today.</p>
<p>Key decision makers will not ask tough questions about these sales - we must ask them ourselves.</p>
<h2>Waste of money? Too bad</h2>
<p>The government is unlikely to recoup all the £45 billion invested in RBS if it sells its shares soon. Shares were originally bought for about £5 each. If they were sold at the current price of around £3, the taxpayer would lose £20 billion. </p>
<p>The government seems to be relatively relaxed about this scenario. This is because they assume the previous government made a significant mistake and overpaid for the banks. The implicit message is that the taxpayer needs to accept these losses – however large they may be. </p>
<h2>Buy high, sell low</h2>
<p>The second question is one of timing. <a href="http://www.guardian.co.uk/business/2013/mar/06/split-rbs-good-bad-banks-mervyn-king">Current thinking</a> seems to assume that the share price of RBS and Lloyds will never return to pre-2008 levels, meaning the government will never be able to recoup the investment it made in both banks. <a href="http://www.ft.com/cms/s/0/e0229c1c-b276-11e2-8540-00144feabdc0.html#axzz2TY1JD41u">Decision makers suggest</a> it is best just to accept a mistake was made and then move on.</p>
<p>However, shares in the banks are close to the bottom of the market. One of the few reliable rules in economics is that markets go through cycles of boom and bust. If you are an investor, it is advisable to buy during low points (when assets are cheap) and sell during booms (when there are plenty of buyers and assets fetch a higher price). </p>
<p>The government seems to be doing the exact opposite of this. Buying the banks at a relatively high price at the end of the boom may have created some greater good (such as ensuring there was no run on the banks). But selling the banks now is likely to do little or no good – the main beneficiaries will be a relatively small number of people able to acquire public assets on the cheap.</p>
<h2>Why sell at all?</h2>
<p>The third question is whether the banks need to be reprivatised at all. The current article of faith is that banks belong in the private sector. The argument goes that market forces mean private sector banks are more efficient, profitable, innovative, have better customer service and create wider economic growth. </p>
<p>In contrast publicly owned banks are backwater of bureaucratic inefficiencies, political interfering and moribund service which slow down the whole economy. However, this assumption <a href="http://muse.jhu.edu/login?auth=0&type=summary&url=/journals/economia/v007/7.2yeyati.html">flies in the face of the evidence</a>.</p>
<p>Public sector banks have been an important part of the broader ecology of banking throughout history. A <a href="http://muse.jhu.edu/login?auth=0&type=summary&url=/journals/economia/v007/7.2yeyati.html">review of evidence</a> comparing public and private banks across the world found results on whether public banks slow the economy were very mixed. We just don’t know whether they can dampen economic activity.</p>
<p>The same review found that the presence of a public bank in an economy will tend to increase the efficiency of private banks and the population’s trust in the banking system as a whole (particularly following large scale financial crises). This means public sector banks can be an important mechanism for stabilising volatile economies.</p>
<p>On the other hand, private banks tend to be marginally more profitable than public banks. There is little difference between public and private banks in terms of lending to small businesses and other socially minded goals like encouraging development. </p>
<h2>A “functionally stupid” decision</h2>
<p>What all this suggests is that little will change if RBS and Lloyds are privatised. The two banks may become slightly more profitable, but the banking sector will likely become less efficient, and the system as a whole may become less stable and trustworthy. </p>
<p>What will certainly happen is that the tax-payer will be landed with a huge bill, a group of private investors will have acquired an asset on the cheap, and our banking system will be even more invested in one single business model which has proved to be prone to spectacular and costly failure in the past.</p><img src="https://counter.theconversation.com/content/14238/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer owns shares in RBS.</span></em></p>The UK could be about to make a multi-billion pound mistake. Plans to sell-off the 82% share of the Royal Bank of Scotland (RBS) and the 39% share of Lloyds owned by the taxpayer are gaining favour in…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/124612013-03-01T03:02:21Z2013-03-01T03:02:21ZLondon’s bad bankers thrown into the lion’s den<figure><img src="https://images.theconversation.com/files/20677/original/8mmbnn42-1361920832.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Another day, another banking scandal: the UK Parliamentary Commission on Banking Standards has exposed the follies of the City's badly behaved bankers. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Though it rarely rates a mention in the Australian financial press, there is a spectacle in London at the moment that rivals even the most ferocious games at the Roman Colosseum. Almost every day, a bunch of bankers (playing the Christians) are thrown into a cage with ferocious lions. The lions are the members of the UK Parliamentary Commission on <a href="http://www.parliament.uk/bankingstandards">Banking Standards</a>, ably assisted by a sabre-toothed tiger (Rory Phillips, QC).</p>
<p>Each session, a sorry load of Lords, Knights and just plain knaves turn up to be savaged by the Committee. If animals were involved, the RSPCA would have intervened by now. But it goes on nonetheless because, although unsavoury, Schadenfreude is deliciously filling, especially if you are a British taxpayer with an empty belly.</p>
<p>The Commission’s remit is very wide. There are enough banking scandals to keep them busy for a very long time, including the LIBOR scandal [<a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">Barclays</a> and <a href="http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfrbsorder020613.pdf">RBS</a>], money laundering [<a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">HSBC</a>], mis-selling of Payment Protection Policies (PPI) to consumers [<a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">Lloyds</a>], and mis-selling of interest rate hedging products (IRHP) to small businesses [<a href="http://www.fsa.gov.uk/static/pubs/other/interest-rate-hedging-products.pdf">all of the above</a>]. The field is so large that the Commission has had to break itself up into smaller panels, currently running at 11 separate sub-committees — and growing.</p>
<p>When questioned by the Commission members, the responses of the Chairmen (all men), CEOs (again, all men) and various senior managers (almost all men) of major banks were all very similar: “Yes, we agree, what happened was awful”, followed by “Yes We were indeed in charge at the time”; then, “Yes, we are very sorry about what happened”, trumped by “But No, we didn’t see it coming”. Clearly, a case of “see no evil”.</p>
<p>If it were an isolated event, such a response would be hard to believe, but benefits of the doubt may have been given. When it is all banks, all boards, and all management across a series of financial scandals, the “dog ate my homework” excuse runs a little thin.</p>
<p>The question that jumps out is: what is the state of corporate governance in UK banks if their boards are unaware of such scandals?</p>
<p>Three “wise” bankers illustrate the shambles that is corporate governance in the UK banking industry.</p>
<p>First, <a href="http://www.jbs.cam.ac.uk/research/associates/stevensond.html">Lord Stevenson of Coddenham</a>, the hapless chairman of Halifax Bank of Scotland (HBOS) when it managed to run up debts of some ₤25 billion dabbling in commercial property before the GFC. The good Lord was <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/c606-xvii/c60601.htm">not behind</a> in pushing himself forward. “I am legally responsible for the business and, with the modesty for which I am not famous, regard myself as being knowledgeable and well briefed”, he told the Commission.</p>
<p>But blow me if the Baron didn’t see it coming. “Beyond peradventure, I take very seriously the fact that we failed to foresee the outcome of events. It is not missing a trick; it is missing a huge avalanche, and I deeply regret it”. (The use of the word “peradventure” is very fitting of an Oxbridge man.)</p>
<p>After a tussle with Commission members as to whether he was in fact in a “non-executive” or “part time” role at HBOS, Lord Stevenson insisted that “as a part-time chairman, there is no possibility that I would have known the detail of what was going on in the corporate division”. In a nutshell, Lord Stevenson’s defence was, even though he was paid some “£600,000 of basic pay a year”, he didn’t have enough time, as a part-time chairman, to do the job properly.</p>
<p>Baron Stevenson then threw Peter Cummings, ex-head of the HBOS corporate division (and the only person to be officially sanctioned in the UK banking fiasco) to the wolves, with faint praise: “A man of huge integrity and, despite everything that happened, of great ability, was in charge of it. I can see, given their view, why they [regulators] enforced against him”. </p>
<p>The next wise banker is Douglas Flint CBE, who had the good fortune to replace the <a href="http://www.channel4.com/news/what-did-lord-green-know-about-hsbc-money-laundering">accident-prone</a> Sir Stephen Green as group chairman of HSBC. Flint is the quintessential numbers man, a grandee of accounting, and has been on the board of HSBC (mainly as chief financial officer) since 1995.</p>
<p>In <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/uc606-xxxiv/uc60601.htm">his meeting</a> with the Commission, he was asked: “Given that the [US] Senate reported that HSBC had ‘long-standing, severe, anti-money laundering deficiencies’, what does that failure tell you about the culture and the organisational weakness in HSBC?”</p>
<p>In true Yes, Minister style, Flint obfuscated. “Certain of the matters that should have been shared and escalated were not being shared and escalated as well as they should have been”. He then threw the new CEO to the wolves. “I would like to ask Mr Gulliver to comment on how we have dealt with the operational side of dealing with these issues that arose”. If Mr Flint has been on the Board for over 18 years, surely he would know more about a long-standing problem than someone who has only been on the board for four years? But obviously Flint had not been told, or did he hear no evil?</p>
<p>There is a cast of pantomime characters who have appeared before the Commission but one, <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/uc606-xxxvi/uc60601.htm">Eric Daniels</a>, ex-CEO of Lloyds Bank, stands out as an exemplar of bad corporate governance. As befits a native of the Wild West, Mr Daniels was suitably combative, denying everything. When asked whether he would so anything different as regards the PPI disaster that developed on his watch, Mr Daniels replied: “In those cases where there were mis-sold products — the customer did not understand what they were receiving, or it was not appropriate for them — that clearly is wrong, but that is not the majority, in my view”. In other words: I see no evil?</p>
<p>Given that PPI has <a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">already cost</a> Lloyds about ₤5 billion in compensation claims, that is a hard argument to sustain. Nevertheless, Mr Daniels did his best Gladiator impression, amid outbursts of laughter from the Commission. It’s all the fault of the regulator [laughter]. “I think that by and large the British banking system is one that serves its customers well … so I believe that while the controls could continue to evolve and always should, they were certainly the best in class at the time”[more laughter].</p>
<p>On the other hand, one can feel a tad sorry for Mr Daniels, who “did not receive a bonus for 2011, 2012 or 2013, nor did I receive one for 2008 or 2009”. But Daniels, who resigned in 2010, had been CEO of Lloyds TSB since 2003, when selling shonky PPI policies started to grow. Save your tears. </p>
<p>For the real aficionados of banking regulation and blood sports, UK Chancellor of the Exchequer George Osborne was, as reporters put it, <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9892708/George-Osborne-grilled-on-banking-standards-as-it-happened-February-25-2013.html">“grilled”</a> by the Commission this week. </p>
<p>We await further testimony and the corrected transcript of the exchanges but, in the week that the UK lost its prized <a href="http://www.guardian.co.uk/money/2013/feb/25/loss-triple-a-credit-rating-consumers">triple-A</a> credit rating, the Chancellor was clearly in garage-sale mode: “a load of RBS branches up for sale, and Lloyds branches as well”. A case of throwing bank staff as well as bankers to the wolves.</p>
<p>For those who are missing their <a href="http://www.guardian.co.uk/tv-and-radio/series/the-killing-episode-by-episode+european-television">weekly diet</a> of European bloodletting, the Commission on Banking Standards is worth watching out for. There’s a lot more to come.</p><img src="https://counter.theconversation.com/content/12461/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Though it rarely rates a mention in the Australian financial press, there is a spectacle in London at the moment that rivals even the most ferocious games at the Roman Colosseum. Almost every day, a bunch…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/122932013-02-20T19:37:26Z2013-02-20T19:37:26ZIn the Tour de Finance, who will be the Lance Armstrong of the financial markets?<figure><img src="https://images.theconversation.com/files/20397/original/kgzxp92f-1361249394.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">RBS joins the list of banks implicated in the ever-widening LIBOR scandal.</span> <span class="attribution"><span class="source">Flickr\ell brown</span></span></figcaption></figure><p>In his recent interview with Oprah Winfrey, Lance Armstrong belatedly admitted to taking illicit drugs throughout his career. But in doing so, he also shed light on a corrupt culture within the sport involving colleagues, sponsors and even the governing body of cycling. Drug taking was such an integral part of the sport that, because the sport was gaining in popularity, nobody wanted to rock the boat. Everyone was benefiting from the deceit.</p>
<p>Last week, the Commodity Futures Trading Commission (CFTC) handed down a <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6510-13">damning report</a> on the Royal Bank of Scotland (RBS) and its part in the ever-widening LIBOR scandal, which has already engulfed <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">Barclays</a>, <a href="http://www.cftc.gov/PressRoom/PressReleases/pr6472-12">UBS</a> and is about to <a href="http://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">touch others</a>.</p>
<p>The RBS report is shocking because it details blatant examples of market manipulation, widespread collusion, and anti-competitive, cartel-like behaviour. The conversations between bankers and brokers in multiple firms to manipulate LIBOR are laid out in shocking snippets of expletive-laden market jargon and workplace bonhomie. Transcripts record the fact that traders knew that they were doing wrong; they just didn’t think that they would be caught. They, like Armstrong, thought were above the law.</p>
<p>But RBS is not unique. The same brazen tactics used to extract unwarranted profits from manipulating the markets were reported at UBS and Barclays. Nor was it just the banks: the exploitation also involved brokers, who were bribed by under-the-counter payments to rig the largest financial market in the world to the detriment of their clients.</p>
<p>It was not just the frontline troops. The reports into Barclays and UBS detail instances where the most senior management of these companies were actively involved in manipulating the market to protect their jobs. The CFTC inquiries also document massive failures of compliance functions within all of these banks; <a href="http://www.investopedia.com/terms/c/chinesewall.asp">Chinese Walls</a> were burned down in the dash for instant profits.</p>
<p>When the reports are put together — and doubtless amplified by more to come — a picture of corruption emerges across the industry. Manipulation of the $300 trillion interest rate market had become so commonplace that it had become part of doing business. Specialists moved between firms keeping their networks alive by sending over crates of champagne to one another when backs had been scratched. The LIBOR trough was so enormous that there was enough for every pig to gorge themselves silly.</p>
<p>How long had this deceit been going on? Technology has allowed investigators to find instances dating back to 2005, in the super-heated markets before the GFC. But one <a href="http://www.ft.com/cms/s/0/dc5f49c2-d67b-11e1-ba60-00144feabdc0.html">ex-trader</a> reports that, as a new trader the early 1990s, his colleagues considered him amazingly naive when he reported what he considered to be manipulation.</p>
<p>At this point, one might ask: what were regulators doing? There were a number of studies, by normally astute bodies such as the <a href="http://www.imf.org/external/pubs/ft/gfsr/2008/02/pdf/text.pdf">IMF</a>, which concluded that while manipulation was alleged it could not be proven. These regulators were not duped. It transpires that manipulation was so widespread it was no longer anomalous, but was part of the background noise of the market. When there is collusion to rig market prices, who can say what the real market price should be? Certainly not post-hoc statistical analysis.</p>
<p>In itself, the widespread corruption in the global interest rate markets would be sufficient to warrant a serious re-think of banking regulation. But in the past few years, major banks have also been accused and found guilty of <a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">money laundering</a> (HSBC and Standard Chartered), <a href="http://www.washingtonpost.com/wp-dyn/content/article/2010/07/15/AR2010071505111.html">securities fraud</a> (Goldman), <a href="http://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">tax avoidance</a> (Australian banks) and <a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">deceptive practices</a> (UK banks) in multiple markets. There is a stench of corruption in the global financial markets that will not be removed except by root-and-branch reform.</p>
<p>Who should tackle this mammoth task?</p>
<p>Certainly not the global banking regulator, the Bank for International Settlements (BIS), which has been <a href="http://theconversation.com/is-the-basel-process-broken-you-can-bank-on-it-11488">captured</a> by the largest banks. Self-regulation doesn’t work either, as shown by the failure of the British Bankers Association (BBA) to police its own rules on LIBOR. Local regulators are finding it hard to chase companies beyond their parochial jurisdictions. The largest banks are adept at routing dodgy transactions through so-called Special Purpose Vehicles, located in offshore banking centres such as Ireland, to evade local scrutiny.</p>
<p>Is there a better model?</p>
<p>We can look to sport for an example. The World Anti-Doping Agency (<a href="http://www.wada-ama.org/en/About-WADA/">WADA</a>), headed by Australian John Fahey (a modern day Elliot Ness if ever there was one), has created a regime that means that while an offender may not be caught today, information is painstakingly collected that can be analysed later to detect drug-taking. It is CSI applied to sport. This system eventually led to the confessions that finally brought Lance Armstrong down.</p>
<p>In their next meeting, the G20 should create a World Financial Crimes Agency (WFCA), based loosely on the WADA model. The role of such an agency would be to collect data from financial markets around the world and to test for possible financial crimes. Such an agency would actively encourage whistle blowing and prod legislators to provide protection for whistle-blowers. The body would also ensure that bank boards, like sporting administrators, sign up to a campaign to drive white-collar crime out of the financial industry.</p>
<p>The costs would be a pittance compared to the economic damage inflicted by market manipulation and might start to restore public faith in the financial markets.</p>
<p>There is a possible candidate for the Armstrong role. His name is Thomas Hayes, who has been <a href="http://www.telegraph.co.uk/finance/libor-scandal/9737068/Three-arrested-in-SFO-Libor-rigging-investigation.html">outed</a> by the press as the probable ‘Senior Yen Trader’ at UBS. This senior banker was a Svengali who successfully orchestrated “campaigns” to manipulate the LIBOR markets. Mr Hayes, if he is indeed the infamous Senior Yen Trader, will never work in the financial markets again and hence should be encouraged to come clean about the deception in return for some form of protection. Perhaps a segment on Oprah awaits.</p><img src="https://counter.theconversation.com/content/12293/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In his recent interview with Oprah Winfrey, Lance Armstrong belatedly admitted to taking illicit drugs throughout his career. But in doing so, he also shed light on a corrupt culture within the sport involving…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/120892013-02-08T02:45:26Z2013-02-08T02:45:26ZThe long tail of the LIBOR scandal: RBS settlement opens the gate to civil penalties<figure><img src="https://images.theconversation.com/files/20048/original/rxspxdc7-1360282084.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Failures of compliance and culture have been attributed to the RBS' misconduct in the LIBOR manipulation scandal.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The fallout from the London Interbank Offered Rate (LIBOR) scandal continues apace with the announcement on Wednesday that the Royal Bank of Scotland (RBS) had reached a <a href="http://www.reuters.com/article/2013/02/06/us-rbs-libor-idUSBRE91500B20130206">$US612 million settlement </a>with the UK’s Financial Services Authority, the US Commodity Futures Trading Commission, and the US Department of Justice, regarding accusations it had manipulated LIBOR.</p>
<p>Like the settlements with Barclays and UBS that have preceded it, the misconduct at RBS is linked to a failure of compliance and culture. The <a href="http://www.justice.gov/iso/opa/resources/28201326133127414481.pdf">deferred prosecution agreement</a> (DPA) notes that not only did RBS lack a compliance program sufficient to detect and prevent such conduct, but it placed derivatives traders and submitters together at the same desk, magnifying potential conflicts of interest. Even when separated, the <a href="http://ftalphaville.ft.com/2012/06/27/1062301/libor-manipulation-done-for-you-big-boy/">misconduct continued</a> through an internal instant messaging system. Extracts of instant messages between traders suggest that manipulation of LIBOR was both encouraged and tolerated by at least junior level managers within the bank, with a former employee bringing an action in Singapore for wrongful dismissal on the basis that the bank condoned the manipulation.</p>
<p>Despite the magnitude of the fine, the market reacted favourably to the announcement, with shares in RBS rising 1.3% upon the announcement. There are a number of possible explanations. First, the RBS’ misconduct was relatively low in contrast to Barclays and UBS. RBS traders were attempting to manipulate the rate for personal gain, in contrast to Barclays, where senior management tried to make the bank look healthier during the 2008 financial crisis. Second, RBS is 82%-owned by the British government. Bailed out with the <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4291807/Banking-bailout-The-rise-and-fall-of-RBS.html">largest-ever rescue effort in 2008</a>, any significant fine imposed by the regulators would be punishing the British taxpayer. As a pre-emptive measure, the RBS has confirmed that the financial impact of the settlement will be cushioned through recouping £300 million from a reduction in pay and bonuses of approximately 1,500 senior staff in its global markets division. Third, the fine fell short of expectations.</p>
<p>Any sense of closure in relation to RBS should be cautioned, as the regulatory fine is likely to dwarf any civil penalties. According to the DPA, RBS made hundreds of attempts between 2006 and 2010 to manipulate the Yen and Swiss Franc LIBOR rates and made false LIBOR submissions, with a dozen of the bank’s employees involved in the trades. “It’s just amazing how LIBOR fixing can make you that much money … it’s a cartel now in London” <a href="http://www.independent.co.uk/news/business/news/its-just-amazing-how-libor-fixing-can-make-you-that-much-money-traders-gleefully-admitted-rate-fixing-was-cartel-8483505.html">wrote one RBS Yen LIBOR trader in an instant message</a> in August 2007. The DPA states that a series of electronic transactions links RBS traders to those at other banks, particularly Swiss bank UBS AG. UBS has <a href="http://uk.reuters.com/article/2012/12/19/uk-ubs-libor-idUKBRE8BI00L20121219">already been fined</a> $US1.5 billion and two of its traders have been charged by US regulators in connection with the scandal. This third settlement leaves little doubt that the collusion among banks and between banks and money market brokers is both widespread and systemic.</p>
<p>Following the initial Barclays settlement, numerous lawsuits have been filed against some of the world’s largest banks in connection with their alleged manipulation of LIBOR. Many of these cases are class action suits brought on behalf of a diverse group of plaintiffs including investment managers, lending institutions, derivatives users, brokerage firms and municipalities. Besides alleging that LIBOR-submitting banks artificially suppressed the published LIBOR indications and caused plaintiffs to earn a lower rate of interest on investments, some plaintiffs have also claimed that the banks conspired to suppress LIBOR.</p>
<p>Evidence of collusion between banks will be a crucial factor in determining the outcome of class action lawsuits. Given LIBOR’s centrality to interest rates on mortgages, credit cards, student loans, and other consumer financial products, the list of potential plaintiffs is potentially endless. Further, at least a dozen other banks, including Citigroup, JPMorgan Chase, Bank of America and HSBC face similar investigations. While the regulatory actions are settled, the civil cost of stacking the deck is, as yet, unknown.</p><img src="https://counter.theconversation.com/content/12089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Olivia Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fallout from the London Interbank Offered Rate (LIBOR) scandal continues apace with the announcement on Wednesday that the Royal Bank of Scotland (RBS) had reached a $US612 million settlement with…Olivia Dixon, Lecturer, Faculty of Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/81542012-07-10T02:09:02Z2012-07-10T02:09:02ZBarclays scandal poses uncomfortable questions for Serious Fraud Office<figure><img src="https://images.theconversation.com/files/12749/original/pc4sjcmb-1341883986.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Barclays' manipulation of the LIBOR has raised questions about the Bank of England's lack of regulatory oversight.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The United Kingdom has had a remarkably poor track record in prosecuting serious economic fraud. In part, this can be traced to deficiencies in the toolkit available to the Serious Fraud Office, a fact acknowledged in an <a href="http://www.sfo.gov.uk/media/34318/de%20grazia%20review%20of%20sfo.pdf">independent review</a> conducted in 2008, which found that the agency expended “significantly more resources per case than its New York counterparts and achieves significantly less for its efforts, as measured by both its productivity (the number of defendants prosecuted) and its conviction rate”.</p>
<p>Just as FIFA, the governing body of world soccer, has pledged to introduce additional referees and goal-line video technology, the Serious Fraud Office is to be handed a significant increase in its leveraging capacity to bring complex investigations to a close - and hopefully brings enhanced productivity with it.</p>
<p>As I reported last month, a <a href="http://www.clmr.unsw.edu.au/article/ethics/white-collar-crime%2C-aml%2C-bribery-%26-corruption/corruption-and-enforcement-i-perils-transplantation">consultation process is under way</a> in the United Kingdom to introduce the deferred prosecution as the primary mechanism to bring corporate wrongdoers to account. The proposed reforms focus primarily on the operation of the UK’s Bribery Act which, on paper, contains some of the most stringent provisions against corruption. The reforms have been justified on the basis that they bring enforcement practice in line with counterpart agencies in the United States, reduce the possibility of arbitrage and accrue revenue to the Treasury. The efficacy of the proposed system is likely to tested sooner rather than later.</p>
<p>The corruption under investigation centres neither on extractive industries nor multinational operations in the developing world. Rather, it focuses on alleged corruption within the City of London: one of the twin epicentres of global capital markets. There are three strands to the investigation, each of which raises profoundly uncomfortable questions for corporate, regulatory and political actors as well as the SFO itself.</p>
<p>First, there is the question of whether investment banks individually or collectively colluded in manipulating the LIBOR rate to facilitate derivative bets. Barclays has conceded that its internal controls were insufficient to stop the mispricing of LIBOR rates from 2005-2009 and paid a total of $454 million as a consequence to regulators from the United States and the United Kingdom.</p>
<p>Second, there is the unresolved question of whether the action was implicitly or explicitly condoned by the Bank of England through a lack of oversight, notwithstanding the fact that concerns with the operation of LIBOR date back to 2007. In its defence, Barclays has complained that it repeatedly expressed concern to British regulatory authorities that other unnamed banks at the height of the crisis were deliberately providing implausibly low figures to the LIBOR panel. </p>
<p>Third, there is the even more problematic issue of whether the lack of decisive action was the result of bureaucratic pressure - a question teased out in testimony from Paul Tucker, the Deputy Governor of the Bank of England to the Treasury Select Committee on Monday). Mr Tucker mounted a vigorous defence to MPs, arguing that at no stage did he or civil servants seek to influence Barclays submission. The import of the conversation, he claimed, was an attempt to help the bank help itself by not being run off a cliff by trading staff. In emails released by the Bank of England to the Treasury Select Committee, the unnamed Whitehall senior source cited by Barclays former chief executive, Bob Diamond, in a note detailing a conversation with Mr Tucker in which which the central banker allegedly expressed political concern at the LIBOR rates posted by Barclays was revealed to be Sir Jeremy Haywood, the Cabinet Secretary.</p>
<p>Whether Mr Haywood was, in turn, reflecting the considerations of his political masters remains at this stage unresolved. It can only be addressed by calling him to give evidence. The then Chancellor, Ed Balls, has called on his successor George Osborne to withdraw accusations that there may have been political interference, thus ensuring that the political firefight will continue. </p>
<p>What is more troublesome, however, is the testimony provided by the Deputy Governor of the Bank of England that the scandal has revealed a heretofore unrecognised “cesspit”. What he had thought to be a malfunctioning market was in fact a dishonest one. He called on the Financial Services Authority’s review of the operation of LIBOR to be extended to all unregulated markets. As the Guardian’s <a href="http://www.guardian.co.uk/business/2012/jul/09/tucker-libor-innocent">Nils Pratley has acerbically noted</a>, Mr Tucker my be innocent; but the innocence on display hardly provides confidence in his ability to lead the Bank of England. </p>
<p>Just who or what institution should be the primary focus for the Serious Fraud Office investigation is therefore unclear. In addition, the very staging of parliamentary inquiries limit capacity to pursue criminal investigations. In addition, the agency is coming to the investigation exceptionally late in the game, with little if anything to add in terms of reputation or resources.</p>
<p>The decision to reopen the investigation into LIBOR after ruling it out last year demonstrates not only the severity of the crisis, but the lack of experience and capacity in dealing with malfeasance and misfeasance in the City of London.</p>
<p>An additional cash injection by the British government of $4.65 million is laughable when set against the fact that Barclays alone has committed $155 million to date on the investigation and the bank of only one of a number of entities facing the multi-agency global probe. Moreover, the SFO’s request for formal assistance from the Financial Services Authority (FSA) has yet to be answered. The FSA has its own reputation to protect. It had decided not to <a href="http://www.fsa.gov.uk/pubs/other/rbs.pdf">prosecute any executive from RBS</a> over its collapse - the biggest bank failure in British history - on the grounds that there were no reasonable prospect of securing a conviction. In the event that this is reasonable to expect in the LIBOR scandal, the FSA is likely to want to retain its turf, if only as an epitaph - the agency is to be disbanded next year in large part as a consequence of its failure to police the boom that preceded the 2007 global financial crisis. </p>
<p>Where the SFO does have potential traction is in the expanded range of mechanisms at (or soon to be at) its disposal. The possibility to offer a deferred prosecution has the potential to act as an incentive for the banks under investigation if there is a calculation that the activity complained of is at a par with or demonstrably worse than that accepted by Barclays in its settlement agreements.</p>
<p>The deferred prosecution and its companion, the non-prosecution agreement, has been one of the most successful (if contested) mechanisms used by the Department of Justice in dealing with economic crime, most notably contraventions of the Foreign Corrupt Practices Act. It was used sporadically to prosecute securities and accounting fraud in the aftermath of Enron but was discontinued following judicial claims of overreach in a case involving KPMG, where the Department was accused of acting unconstitutionally. The non-prosecution agreement with Barclays saw its return to the financial services arena with a vengeance.</p>
<p>If, however, the SFO had any thought that its application of the deferred prosecution could prevent future arbitrage, however, it is sorely mistaken. The British government has explicitly precluded the use of non-prosecution agreements and require judicial approval that a settlement is fair, reasonable and in the public interest, thus constraining the discretion available to its US counterpart.</p>
<p>For a corporation looking to embark on settlement talks, the United States remains a more rational choice not least because the reputational staining associated with a non-prosecution agreement is less indelible. The SFO has a lot to prove - and lose - in the coming months. Having a seat at the refereeing table is not the same as exercising ultimate decision. That is likely to remain in the hands of the US Deparmtent of Justice for some time to come. </p>
<p><em>Justin O'Brien writes a column for The Conversation, <a href="https://theconversation.com/columns/justin-obrien-4470">The ethical deal</a>, and is director of the <a href="http://www.clmr.unsw.edu.au">UNSW Centre for Law, Markets and Regulation portal</a>, where this story also appears.</em></p><img src="https://counter.theconversation.com/content/8154/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O'Brien receives funding from the Australian Research Council for three grants related to corporate governance, financial regulation and accountable governance. This opinion is simultaneously published on an online portal that maps and tracks regulatory reform in the aftermath of the GFC - <a href="http://www.clmr.unsw.edu.au">www.clmr.unsw.edu.au</a></span></em></p>The United Kingdom has had a remarkably poor track record in prosecuting serious economic fraud. In part, this can be traced to deficiencies in the toolkit available to the Serious Fraud Office, a fact…Justin O'Brien, Professor of Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.