Royal Bank of Scotland was under pressure to strip companies of their assets to improve its balance sheet, The Times can reveal.
The bank’s global restructuring group, which was supposed to help businesses in trouble with debt, was given a remit by RBS’s management to focus on reducing exposure to businesses that had badly affected its capital position. This was in response to pressure from regulators and politicians.
RBS has always insisted it “would never get any advantage from destroying a customer”, after GRG was accused two years ago by Lawrence Tomlinson, an entrepreneur and former government adviser, of “engineering defaults”.
However, an investigation by The Times has found that GRG could achieve a benefit to its core tier-one capital — the basic measure of bank safety that is crucial for passing regulatory stress tests — when defaulting high-risk but performing customer loans. The activity was part of a broader plan, agreed with the Treasury, to improve the RBS balance sheet, which insiders and campaigners say has contributed to the damage and, in some cases, destruction of thousands of British businesses.
GRG is already subject to a Financial Conduct Authority investigation, although public scrutiny has been limited to how the bank was said to have “profited” from companies’ collapse, rather than on its balance sheet implications.
Derek Sach, the former head of the restructuring unit, told MPs last year that capital reduction was never applied to small and medium-sized companies in GRG, despite acknowledging that going “for more foreclosure” would, in theory, strengthen the bank’s balance sheet.
However, in 2011, the bank trained hundreds of frontline GRG staff in how to assess the small and mid-sized companies they were restructuring in terms of their impact on the bank’s capital ratio. RBS claims that GRG’s main function is to return troubled busi-nesses back to health at the same time as protecting the bank’s position.
Once in GRG, affected companies say they were subjected to excessive fees and charges and to questionable revaluations of the assets their loans were secured against. This often resulted in companies defaulting on loans, which, in turn, led to them losing these assets or even their business. RBS also implemented the reduction of companies’ capital impact on the bank as a performance metric within GRG in 2011. The lender gave an internal award to Andrew Chen, the head of decision support, for delivering the “GRG capital tools” training programme. Tens of thousands of businesses have been through the division in recent years.
Supporting smaller businesses has a disproportionately large capital impact on banks, so reducing exposure to them improved RBS’s capital position. Bank insiders said this has manifested itself in pressure being placed on businesses that were deemed capital-intensive. Many were viable and profitable operations, but became viewed internally as too costly to continue to support.
The Serious Fraud Office has said that it is “monitoring developments” around GRG. The approaches employed by RBS as they called in business loans, and how this improved the bank’s capital position, are understood to be of interest to investigators.
RBS said: “Following the reckless lending leading up to the financial crisis, many of our customers and their businesses ended up in serious financial difficulty. GRG helped minimise losses where it could and successfully restructured a significant number of businesses it worked with, advancing over £100 million of new lending and safeguarding hundreds of thousands of jobs.”
Andy Keats, a director of SBCB, said that it was “deeply disturbing” that a drive to improve a bank’s capital position could have such a negative impact on small companies. He added that he feared other lenders may have taken a similar approach. The information revealed today applies to all banks, not just RBS. On the basis that it is revealed that there is an incentive to deliberately default a properly performing business loan, the question has to be, why wouldn’t a bank in financial trouble do so?”