Bill Jamieson: Phoenix can rise from banking ashes

People queue to buy shares in TSB in 1986 the beginning of the banks downfall. Picture: Hamish Campbell

Now, five years forward from the start of the banking crisis, a further fiasco has unfolded and brought us to the brink of what could be another banking debacle – or a potential renaissance.

Yesterday’s pull-out by the Co-op from a deal to buy 631 Lloyds Banking Group branches marks an ignominious end to a prolonged and expensive three-year grind of sale preparation, bidding and negotiation: not so much “Project Verde”, more “Festina Lente”.

In pulling out, the Co-op blamed increased regulatory costs, changed economic circumstances and poor prospects for the banking sector. Indeed, its rationale sparked speculation that it may itself be pondering an exit from banking – firmly denied by the company yesterday.

Even allowing for a stagnating economy, this pull-out is an embarrassing shambles for the government and industry regulators. It demolishes hopes of a major new competitive force in UK banking. But it also presents an opportunity for a fresh start, especially here in Scotland.

Lloyds says it is now seeking to sell the branches as a stand-alone bank through a stock market listing under the TSB Bank name. The portents are not good. Some of the branches put up for sale are poorly sited. They are in secondary locations in rundown areas with a shrinking customer base. Both the branches and the network are in need of overhaul.

How has the TSB we once knew come to this? Long-standing TSB depositors can be forgiven an ominous sensation of déjà vu. Was not TSB floated once before on the Stock Exchange? Indeed, was this not the beginning of a long chapter of misfortunes?

The latest regulatory mayhem and muddle was preceded by a fateful shotgun “merger” by its Lloyds parent, which has since had to battle with traumatic consequence. Buried in this was the glorious mission and distinctiveness that was once the TSB.

The Trustee Savings Bank (as was) had a proud and distinctive history, dedicated to the provision of banking services for lower income individuals and households. It was a favoured first bank account starting point for young people.

For much of this we have to thank the Reverend Henry Duncan of Ruthwell in Dumfriesshire, who established the first trustee savings bank for his poorest parishioners in 1810. From the outset, savings banks set out to create and encourage thrifty habits among small and medium-sized savers. Managed by local worthies who were appointed trustees (hence the name), their philanthropy and commitment to local communities was marked.

The TSB has – or had – powerful resonance in Scotland. It was constituted under Scots law and the law had to be changed to allow its Stock Exchange flotation. Localism was deeply entrenched. Indeed, it was not until 1985 that the various trustee savings banks across the UK were amalgamated into a single TSB Group Plc institution. This was the entity floated in 1986, requiring changes to Scots law. There was spirited opposition from a brave few who fought a rear-guard action in the High Court. But the earnest assurances of beneficial change were accepted by most with little question. The flotation went ahead.

What followed exceeded the worst fears of the rear-guard rebels. Barely a year later, the new TSB was to make a catastrophic error of managerial aggrandisement. It launched a £770 million takeover bid for Hill Samuel merchant bank, just days ahead of the October 1987 stock market crash, converting an already generous offer into a ruinously expensive deal.

Hill Samuel then embarked on a reckless corporate lending spree, culminating in losses of £441m in 1991. TSB was lucky to limp on to an agreed merger with Lloyds Bank in 1995. What remained of the once swaggering Hill Samuel corporate finance arm was sold off. The remaining retail banking operation made the joint group the largest bank in the UK by market share.

The proximate cause of the recent troubles was the “merger” of Lloyds TSB with the stricken HBOS in 2008, steamrollered through by the government’s suspension of its own Competition Commission rules. The new enlarged group was duly baptised in the lubricious verbal oil of “synergistic benefits”. But barely had the deal been completed than the European Commission predictably intervened to oblige Lloyds to disgorge hundreds of its branches.

To the initial misjudgment of the “merger”, Lloyds’ management now succumbed to another: a naïve belief that in the traumatised new world of retail banking, such a disposal would present few difficulties.

Thus we are led back to TSB flotation Mark II. Might history fully repeat itself? Not if the distinctive mission and persona of the TSB we once knew is placed centre-stage.

Across the retail banking sector runs an unspoken objective to quietly shed or discourage low-income, low-profit customers in favour of middle and high “net worths”.

But across the financial sector and industry observers more generally is a concern, not only to break up the banking cartel and encourage competition, but also to improve financial education among the young and re-encourage thrift – a word that has fallen about as far out of favour in modern Britain as “philanthropy” (dictionary definition: altruistic concern for human welfare and advancement, usually manifested by donations of money, property, or work to needy persons, by endowment of institutions of learning and hospitals, and by generosity to other socially useful purposes).

And at least as desirable as these is a return to the localism that the TSB championed. That such values became lost in the banking merger mania of the past 30 years explains much of what’s gone wrong in banking.

A restoration of these core values should lie at the heart of a return of the TSB name. For a bank in the electronic age and failing high streets has to be something more than a collection of disparate and run-down branches. More apt than a straight stock market float would be a form of joint partnership with depositors and staff becoming majority owners.

Add to this the high hurdles facing new entrants and the costs of sharply increased regulation and the vendors have to accept a significantly lower price for the package of branches being sold. Even then, any new owner would face the formidable challenge of putting together a modern banking proposition, both in physical presence and in its digital online services to build a new, younger customer base.

For this sale to succeed, it has to offer something better than, and different to, what’s already available in the market. And in that search for success, it is the core values of the TSB that demand revival, not the name merely. If it is renaissance we seek, there is no better way.