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 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.
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 radical split. Similarly, investors are also miffed. For instance one senior asset manager declared it “a dreadful day for RBS as political expediency overrides shareholders’ best interests”.
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.
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 little evidence that publicly owned banks are any better at lending to individuals and SMEs.
Repair work needed
So RBS has put off the hard work of breaking up. But mending the bank is still going to be a difficult task.
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 by £13.6 billion. Other costs include an additional £225m to settle claims for PPI, bringing the total paid out to £2.6 billion, and a £390m fine for manipulating Libor.
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 lawsuit being pursued by the US Mortgage agency, Fannie Mae. But perhaps most worrying is the investigation into the Bank’s role in the manipulation of global currency markets. All this adds up to a huge potential price RBS needs to pay to put its past behind it.
A fine solution
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 more money on lawyers and fines than it spends on its employees salaries.
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.
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.
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.
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.
The new CEO, Ross McEwan, has decided to focus on rebuilding the bank’s customer service. This is vital as a report released today suggests SME customers are not happy with their service from the bank, and a similar story appears to be true for individual customers.
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.
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 satisfied with their jobs. Any organisation that has experienced so much negative press is likely to have disheartened employees.
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.
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.
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.