Bill Jamieson: Who gets RBS if the UK breaks up?

In any break-up, whether of households or of nations, the hottest dispute is over who gets what: that acrimonious division of the spoils. It can turn the best intentions of a velvet divorce into a war zone.

In any break-up, whether of households or of nations, the hottest dispute is over who gets what: that acrimonious division of the spoils. It can turn the best intentions of a velvet divorce into a war zone.

In the approach to Scotland’s independence referendum in 2014, the risks of complex and bitter argument are high. And few questions will be more complex and bitter than this: which government will be left holding the 83 per cent stake in Royal Bank of Scotland?

Sign up to our Opinion newsletter

Sign up to our Opinion newsletter

Now for many, a detailed statement of asset pluses and minuses will not be the deciding influence in how they cast their preference. But voters will want a reasonably accurate grasp of where they stand, whether we will have a bearable debt burden or an intolerable one, a deficit we could cope with or one that might sink us. On any divorce list, the ownership of the taxpayer stakes in RBS – and the 41 per cent stake in Lloyds Banking Group – are set to be among the most contentious.

There may seem at the outset little to discuss. RBS is indisputably a Scottish bank. It is registered in Scotland. Its head office is in Scotland. But its origin and foundation is intertwined with the Act of Union. It traces its origin to the Society of the Subscribed Equivalent Debt set up by investors in the failed Company of Scotland to protect the compensation received as part of the arrangements of the 1707 Acts of Union. The company wished to move into banking and the British government looked favourably on this as the rival Bank of Scotland was suspected of having Jacobite sympathies. The new bank came into being in 1727 as the Royal Bank of Scotland.

The story of its dramatic expansion in the decade to 2008 under chief executive Fred Goodwin is now well known. RBS grew by aggressive acquisition to become not just one of the biggest banks in the UK but one of the top five in the world. This period culminated in the take-over bid for Dutch banking giant ABN Amro.

Then came the bust. Struck down by huge exposures to US sub-prime debt and by an inability to raise funds in wholesale markets, RBS foundered in late 2008 and had to be bailed out by the UK government which took an 83 per cent stake.

This shareholding, acquired at 50p a share, is currently held by the UK Treasury on behalf of all UK taxpayers. The total cost was £45 billion. RBS shares currently stand at 24.1p. They bounced up last week on news of yet another swathe of redundancies at its global markets and investments division. But the book loss on this holding is still a colossal £23 billion. There is also a pile of some £187 billion of toxic assets to be managed.

For all these liabilities, RBS is still a formidable force in both domestic and business banking in Scotland. It may represent a liability currently, but hopefully will not always remain so. Through its history and provenance it would seem to lie squarely within the Scottish estate. But does it?

First Minister Alex Salmond does not seem to think so. He said in an interview with Channel Four news last week that an independent Scotland would not share the UK government’s exposure to the Royal Bank’s toxic assets. “The people responsible for [RBS]”, he declared, “... were the London Treasury. Unfortunately they were also responsible for regulating, or at least misregulating, the financial sector as well. I’m afraid people have to take responsibility for the past mistakes they have made”.

This would appear to leave RBS firmly within the bailiwick of Westminster.

However, objections are already being raised to this. First, it is certain the Treasury will query how an SNP administration could fairly lay claim to North Sea oil assets but choose to reject any share of a Scottish bank’s liabilities.

And second, it is by no means clear that an SNP administration would have regulated RBS any differently at the time. Indeed, by way of furnishing a historical aide memoire, Channel Four News last week produced a letter written by the First Minister to Sir Fred Goodwin in 2007 expressing full support for the ABN Amro bid, saying that it was “in Scottish interests for the RBS to be successful and I would like to offer any assistance my office can provide”. This would suggest that regulation in Scotland would have been little different.

The position of the Scottish government is that in the run up to the financial crisis the Scottish Exchequer would have received only an appropriate share of the tax revenues from RBS as taxes are typically allocated on the basis of the location of economic activity rather than HQ. And the bank bailout was to support the entire UK financial system – RBS’s assets and liabilities were spread across the UK – not just the Scottish market. Scotland would therefore take a proportionate share of liabilities. On this basis, an approximate share (such as GDP or per-capita) would be appropriate. Equally, Scotland would be entitled to a similar share of any profit ultimately arising on a sale of the 83 per cent stake.

Whether present liability, or future asset, what might the legal position be? A constitutional expert close to the original 1998 Scotland Act advises me that neither the UK’s assets nor liabilities in or outwith Scotland (and this would include the UK Government’s shareholding in RBS whether it is regarded as an asset or liability) would be automatically affected by a “yes” vote or by any subsequent Westminster Act giving Scotland independence. What is likely to happen is that in the run-up to that Act all such questions will have to be added to the long list about the currency, defence establishments, etc, which will have to be discussed and agreed between the UK and Scottish Governments and Parliaments. His counsel is that both governments should address these questions prior to the referendum being held so that (a) people know what the consequences of a “yes” vote will be and (b) even more important in the event of a vote on independence, the UK government is not held to ransom over such questions by a Scottish government claiming to represent the will of the Scottish people.

Further advice is as follows. Any policy of dividing up the shareholdings of RBS and Lloyds Banking Group would be subject to a myriad of problems. The issue is complicated by the fact that RBS (and Lloyds Banking Group) is subject to three types of support from the UK government.

First, there is the implied guarantee of solvency of the “too big to fail” banks, reckoned to be worth £50 billion a year to the UK banks. Second, there are the guarantees of retail deposits underwritten by the UK government. And third, there are specific guarantees in respect of toxic liabilities.

Dividing up the RBS shareholding between the UK and Scotland, either on a 50-50 basis or an apportionment based on population or GDP share would hit problems. Confidence in RBS and its ability to see through its current deleveraging programme rests in some part on the fact that the British state has an effective controlling interest. If that holding by the UK state is reduced then the asset backing of the bank may be questioned by the market – a market currently in little mood to give banks the benefit of any doubt. Equally, if any one of three supports currently provided are diminished by transfer to another government, that may also lead to a negative reaction in the markets.

Would an independent Scotland be able to support the current Scots-registered and headquartered banking sector ? Or might it be forced to shrink the balance sheet base radically? An alternative might be for supervision of RBS and Lloyds to remain with the UK regulator rather than any agency set up by a future independent Scottish government. But that would be a most anomalous situation: which government would be the provider of last resort support? The question of the future ownership of the RBS shareholding alone is horrendously complex and set to keep candles burning long into the night in both London and Edinburgh. And an amicable settlement looks in no way assured.