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It is at least a fortnight since the last round of political sparring on the future of Royal Bank of Scotland, so it is time for another. The latest debate comes ahead of the release of yet another report on the state of the U.K. banking sector, this time by parliament. One of the ideas that the report considers is the division of RBS into a good bank and bad bank.
The proposal looks, if anything, a little late in the day. RBS's non-core loan book, which would presumably be at the heart of the bad bank, has risk-weighted assets of £55-billion ($87.13-billion), or 12 per cent of the group total. Three years ago it had £164-billion in risk-weighted assets, or over a third of the total, so there has already been progress in cutting it down. RBS wants to cut the non-core book to £40-billion by the year end, half of which would run off naturally by 2016.
Is there anything to gain from hiving such a relatively small sum off into a bad bank? Only if it can benefit the government (owner of an 82 per cent stake in RBS) by either enabling the bank to lend more or making the stake easier to sell, or both. Given that the bank might have to be nationalised before a split – at a cost of £7-billion for the remaining shares alone – the government would have to be confident of achieving its goals before going ahead.
The case for either is not proven. Yes, the non-core book is a drag on profits. It generated an operating loss of £2.9-billion last year, reducing group operating profits by 45 per cent. Removing those losses would enable RBS to build up capital faster and so lend more confidently. But it is not clear that the lack of lending is due to low supply rather than low demand. The government could split up RBS and still find that lending is subdued. When it comes to making RBS easier to sell, the politicians could do that far more easily and cheaply by shutting up and letting chief executive Stephen Hester get on with running the bank.
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