We must let bust banks collapse says RBS chief

Published on Tuesday 24 August 2010 19:27

THE Royal Bank of Scotland should not be given a second chance of a taxpayer bailout if it is involved in another financial crisis, its chief executive Stephen Hester has said.

• Stephen Hester said creditors would be insured Picture: PA

In a bold admission that the public would not tolerate further handouts, Mr Hester said all financial institutions - including RBS - should be allowed to fail and suffer the consequences without the state rushing to their aid.

Mr Hester was drafted in when RBS sank under a mountain of debt after the meltdown that followed its disastrous takeover of the Dutch bank ABN Amro before the credit crunch.

He used a speech at the University of Glasgow yesterday to push for a change to the system that would allow banks to declare themselves bankrupt in the same way as other companies.

Allowing banks to fail is an important feature of a healthy financial system, he said, otherwise bankers will once again believe that they can take excessive risks with savers' and companies' money as the government will bail them out, whatever the cost.

His comments provoked a mixed reaction among politicians last night, with some backing his calls, some reiterating that the bank bailouts were vital, and others maintaining that talk of banks being allowed to fail was counterproductive at a time of fragile economic recovery.

RBS's position is that it remains "fully supportive" of the government's decision to come to its rescue in 2008, as "there was no other option at the time".

The bank is now 83 per cent owned by the taxpayer after the government pumped in 45 billion of taxpayers' money to keep it afloat at the height of the credit crisis.

The government extended a similar rescue package to Lloyds Banking Group and also nationalised Northern Rock and part of Bradford & Bingley to save them from collapse. The total cost of the bailouts to the state was 131bn by the end of last year.

Mr Hester said it should be made clear to all companies, including his own, that there will be no repeat of those unprecedented events.

"It is important to the proper functioning of the market that we do not remove the possibility of failure," he told the conference on banking reform.

"That would embed entirely the wrong incentives around risk-taking. The next, and in many ways the most difficult step (in the process of reform], then, is to ensure that banks can fail - but in ways that minimise the impact of that failure on the wider economy."

Mr Hester challenged Sir John Vickers, who is heading the coalition government's Independent Commission on Banking, to devise a system that would allow a bank to file for administration and have its debts restructured - just the same as when, for example, a retailer goes bust.

At the moment, banks are a special case due to the sensitivity around savers' money. But Mr Hester said the UK needs a special process that would allow a bank to sort out its problems and renegotiate its debts without the need for a taxpayer subsidy.

Mr Hester said he is in favour of a system that would allow a bank to pass on some of its losses to creditors. However, he gave his assurance that savers - who are included among a bank's creditors - would generally be protected by insurance.

RBS has enjoyed a strong recovery since the bailout, reporting a return to profit earlier this month and raising hopes of a substantial windfall when ministers finally sell the taxpayers' stake in the business.

Economic experts predicted that the recovery of RBS and that of the 41 per cent taxpayer owned Lloyds Banking Group could eventually yield a handsome financial bonus for the government.

While ministers are taking care not to rule out selling its stakes in the short term, the most likely scenario is that the issue will not be seriously looked at until the government's banking commission is finished by autumn next year.

Mr Hester's comments drew support from Tavish Scott, the leader of the Scottish Liberal Democrats. He said: "This banker is right. Thatcher, Blair and Brown deregulated banks but weren't prepared to accept the consequences of their actions, which was that super-banks became too big to fail. Banking reform, with Vince Cable at the helm, must now happen."

Jeremy Purvis, finance spokesman for the Liberal Democrats added: "RBS was not only too big to fail, it was too big to save. He is broadly correct, but only if the banks are divided." But Scottish Labour MSP John Park said the bank bailouts had helped the UK economy avoid "its most severe crisis since the 1930s" and stopped countless home repossessions and businesses going to the wall.

He added: "If Labour had not saved the Scottish banks, among them Mr Hester's current employer, it would have had a devastating effect on the Scottish economy."

Stewart Hosie, the SNP's Treasury spokesman, who sits on the Westminster Treasury select committee, said banking reforms should help the sector avoid the danger of "moral hazard" - where a party protected from risk behaves differently than if they were exposed to that risk.

But he added: "I do think talk of banks being allowed to fail is not what we should be doing. We should be talking about a properly robust regime of capital ratios and regulation to ensure the banks are equipped to deal with the difficulties that might in the past have led to collapse."