Published at 12:01AM, May 7 2015
The language of finance can be arcane but the business of commercial banking is simply defined. Banks put together people who have capital and want a return on it with businesses that need capital and can deploy it to make a profit. In the case of Royal Bank of Scotland (RBS), there is a part of the story that does not fit this scheme, however. An investigation by The Times has found that a division of RBS called its global restructuring group served the bank by seeking to strip small and medium-sized companies of their assets.
The charge goes to the heart of what has gone wrong with modern finance. Banks are essential to an efficient economy — so much so that a taxpayer rescue of RBS and other lenders from their follies in 2008 was vital to avert disaster. Banks in turn have responsibilities far beyond their own shareholders. The most crucial one is to their own customers. Yet RBS stands accused of sacrificing the interests of its smaller corporate customers in order to improve its balance sheet. This is not the competition on which a market relies; it is exploitation of a privileged position to serve narrow corporate interests.
The global restructuring group’s role was to assist companies in trouble because of excess debt. Yet, in what might almost be a parable of the wider financial crisis, it had perverse incentives that pitted the bank’s own interests against its customers’.
By forcing companies into default, the group could improve the bank’s capital position. RBS denies having acted in such a way, yet staff were trained by the bank in how to reduce exposure to these companies to improve the bank’s capital position. Technically, a default on certain risky but performing loans would improve RBS’s tier-one capital ratio — the measure of safety that is used in bank stress tests.
The division is already being investigated by the Financial Conduct Authority to establish whether it profited from the collapse of corporate customers. The issue raised by our investigation is separate and it compounds public concern.
The Bank of England has rightly treated sceptically the commercial banks’ complaints that they are being asked to do too much. It has insisted that the banks build up their capital reserves, because well-capitalised banks are in a better position to lend and thereby get the economy growing. Recapitalisation by the expedient of exploiting the customer, however, is a scandalous way to conduct business.
Yet the evidence is strong that RBS has conducted its business that way. Its corporate customers complain of being landed with excessive fees and charges. RBS stands accused also of engaging in doubtful valuations of the assets that its loans were secured against, thereby forcing the companies into default and causing them to lose assets. The banks need to be restored to renewed health. The notion that this will happen if they spread suffering and distress, in both the financial and the emotional sense, is preposterous.
Britain’s wider economic recovery depends on business. One constraint, which may lie behind the puzzle over Britain’s poor productivity, is that, whereas labour is mobile, enterprising companies are not getting the capital they need. The banks are not playing their part. And in RBS’s case, there is dispiriting evidence that sound companies are being systematically preyed upon. RBS must answer this allegation now.