‘Vampire division preyed on clients’ it was meant to save

Royal Bank of Scotland’s chairman Philip Hampton

Royal Bank of Scotland’s chairman Philip Hampton

RBS’s restructuring group, which is being investigated by the FCA, earnt a reputation for breaking firms to boost its capital position

Royal Bank of Scotland’s global restructuring group ostensibly exists to nurse troubled business customers back to health. Many of the thousands of companies that have been through the division claim its true function is the exact opposite: they allege that it piles on fees, revalues property that loans are secured against, triggers defaults and takes over assets. Many business owners have lost their livelihoods; others survived with smaller operations than they went in with.

While all big banks have business support divisions, no other lender’s turnaround operation has attracted the notoriety of the global restructuring group (GRG), which is being investigated by the Financial Conduct Authority.

Seven years ago, as the financial crisis took hold and RBS found itself exposed to billions of pounds worth of unprofitable loans, the workforce at the division began to rise from 160 to more than 1,000 staff. The number of complaints from customers also soared.

Sir Philip Hampton, RBS’s chairman, has admitted that the lender had been “too heavy” with business customers on occasion. However, RBS has always insisted that it did not have a motive to “artificially distress” its customers. That was the allegation levelled by Lawrence Tomlinson, a businessman and former government adviser, in 2013, who described GRG as a “vampire” that destroyed small businesses.

Derek Sach, the former head of GRG, told MPs last year that the bank “would never get any advantage from destroying a customer”. An important qualification added to that assertion from Mr Sach has been overlooked — until now.

In what in retrospect looks a prescient challenge from Andrew Tyrie, then chairman of the Treasury select committee, Mr Sach was asked if destroying a customer “may well be in the interests of the bank if it could strengthen the balance sheet”. Mr Sach’s response was a telling: “That is absolutely right.”

While Mr Sach admitted that busting businesses could improve the bank’s capital, he told MPs that he had resisted government pressure for RBS to be tougher on customers in order to shore up the balance sheet. He insisted that “capital reduction” was “never” applied to small and medium-sized businesses.

However, a Times investigation suggests that using GRG to reduce exposure to small and medium-sized business loans did indeed boost the bank’s balance sheet.

At the heart of efforts to improve the safety of big banks after the financial crisis are “risk-weighted assets” (RWAs) which mean that riskier loans demand the borrowers hold more capital against them. If banks cannot show regulators that they are holding the right amount of capital against their RWAs, they could face restrictions on their ability to pay bonuses and dividends. The RWAs required for small and medium-sized businesses are quadruple those needed for lending within the financial system, and double those required for mortgage lending. That means that smaller businesses are more expensive and burdensome for banks to support. Reduce RWAs by getting out of capital intensive loans, and banks improve their capital position.

RBS set about reducing RWAs in 2009, after working with the Treasury to identify high-risk and capital intensive assets across the group, and deciding how best to get out of the positions.

A strategy of “acceleration” of disposal of assets to improve its capital base and boost performance in stress tests was “agreed with Treasury”, a bank document shows.

Despite its longstanding reputation for being tough on businesses, insiders say the feeling elsewhere in the bank was that GRG was not paying enough attention to its capital implications.

To rectify that hundreds of GRG’s relationship managers were trained in how to use “capital tools”, so that staff could understand the impact on the bank’s core tier one capital of the businesses in the division. RWA reduction became a performance metric and staff began to boast on LinkedIn, the social network, of the cuts they had achieved.

How did they do it? One former GRG banker’s profile on the social network tells of how he “reduced risk weighted asset utilisation by 25 per cent”, set “capital goals for staff” and led “negotiations across the department using insolvency processes”.

The juxtaposition is telling. A forensic analysis seen by The Timesreveals that for high-risk but performing loans, RBS’s capital position was better served by defaulting loans than by holding them and nursing them back to health.

Once a loan is in default, RWAs no longer apply. Instead, a deduction is required from the bank’s capital base. For certain loans — the kind typically found in GRG — the capital deduction is less than the equivalent capital held against the loan before default.

Squeezing thousands of business customers who might have thrived had they been given the support they were promised appears to be an unintended consequence of the desire to make banks safer.

It also reveals a motive to support Mr Tomlinson’s damaging allegations against GRG. While most of the senior RBS executives associated with GRG have departed, and the unit is being wound down, laying the “vampire” division to rest is not proving easy.

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