Bill Jamieson: Advisers put a brave face on our banking debacle

Published on Monday 1 June 2009 21:33

READING through the annual report of the joint industry advisory board covering Scotland's financial sector it is hard not to feel some sympathy for the authors.

To them has fallen the task of setting out the catastrophic debacle that has befallen the industry while at the same time talking up prospects for Scotland's financial services. RBS was brought low by a mistimed take-over, the shares collapsed and thousands of jobs are now being shed. HBOS, also headquartered in Edinburgh, has disappeared altogether, acquired by rival Lloyds Banking Group that has now been stricken by tens of billions of HBOS's toxic assets and bad commercial debts.

"Our two biggest banks," writes John Campbell, chairman of Scottish Financial Enterprise in the foreword, "fought to adjust and regain balance in the face of some overwhelming shocks, but," he adds, "were unable to do so unaided."

Well, that's one way of putting it. In the league of understatement it must surely rank with the broadcast of Emperor Hirohito to the Japanese people over the smoking ruins of Tokyo: "The war situation has developed not necessarily to our advantage."

Campbell is senior managing director of State Street Corporation. In another era he may well have had a glittering career as chief executive of the White Star Line: "I can report to shareholders that the Titanic is in good shape, all things considered. The chandeliers have taken a bit of a buffeting and the ship is in two parts. But the silverware is intact and the engines could be restored to full working order, once pulled from the bottom of the sea."

FiSAB , the Financial Services Advisory Board, has made a brave effort to fly the flag for this stricken sector. What a daunting task. It is right that it runs through the plus points of a skilled and experienced workforce. Everything, of course, should be done to ensure the transport infrastructure is as attractive as it can be for inward investment.

And it is no bad thing to remind ourselves – given as we are to bouts of miserable introspective fatalism – that almost every single financial centre worldwide is wrestling with the problems we are now facing. In America alone the number of banks reckoned to be in trouble last September totalled 171. By January that figure had climbed to 252. Today it stands at 300.

But FiSAB is so limited in the tools available to it, so hamstrung by the lack of timely data, and so utterly at the mercy of forces beyond its control that to sustain this whistling in the dark report over 29 pages is heroic. Little wonder it is padded out with four pictures of the First Minister.

Some of its key findings are self-evident to the point of narcolepsy. It asserts that our strengths in insurance and fund management are formidable. But given that six out of the 11 business representatives on the FiSAB board work for insurance or fund management companies, they would say that, wouldn't they? In truth, growth in life assurance and pensions looks problematic, while the fund management industry is dominated by traditional "long-only" funds where investor confidence has been truly shaken.

The report is glaringly weak on up-to-date employment statistics – the latest figures cited are for 2007. When we glean from latest claimant count numbers that unemployment in Edinburgh and Lothians has soared 87 per cent from 8,023 to 17,247 over the past 12 months we have, as they say, a problem. Of course, not all this is due to the banking shake-out. But it gives some idea of how much more widely this has hit – lawyers and estate agencies, legal and accountancy firms, global custody and asset servicing.

Similar statistical black holes can be found in our measurement of financial services as part of Scotland's GDP. For example, in the final three months of last year, which saw a slump in bank lending, the collapse of HBOS and RBS brought to its knees, Scotland's financial services sector was officially claimed to have grown by 2.2 per cent over the previous quarter. This figure is uncritically repeated in the report. It may be statistically "correct". But, in the real world, the sector suffered a series of colossal hammer blows. To define these three months as having been ones of "growth" is laughable.

The Fraser of Allander Institute has been tasked with an assessment of the financial sector's contribution to GDP. But it has run into delays and will not be out until the end of the year.

One way forward for the industry longer-term would be greater involvement by the universities on understanding financial risk – Heriot-Watt has blazed a trail here but there is scope for much more. Economics needs to be rebuilt.

Overall, however, there is a case for the Scottish Government to focus more on business creation generally, not just financial services. It's the strength of the underlying economy that will do much to help this sector recover. And we have to be more than a one-trick pony.