Royal Bank of Scotland

George Osborne Excerpts

Friday 1st November 2013 Written Statements

[The Chancellor of the Exchequer (Mr George Osborne)]

Today I can report to the House that the Government have concluded their review into the case for a Royal Bank of Scotland (RBS) “bad bank” and the new management of RBS is setting out a new direction for the bank.

The new direction for RBS, supported by the management and board of RBS, UK Financial Investments (UKFI), the Government (its biggest shareholder), and the Bank of England (its prudential regulator), will lead RBS to being a boost to the British economy instead of a burden. It is part of the Government’s economic plan for sustaining the economic recovery and creating a banking system that works for Britain. It will enable RBS to focus on its core British business, supporting British families and companies.

The new direction includes:

i) A bad bank to separate and wind-down RBS’s poorly-performing and high-risk assets that are a legacy of what went wrong in its past. This will enable RBS to look to the future and deliver its new strategy. Instead of an “external” bad bank that would require further support from the taxpayer, this will be an “internal” bad bank funded by RBS itself. This will target the wind down or sale of approximately £38 billion of assets within three years;

ii) Fully selling Citizens Financial Group in the United States and continuing to shrink RBS’s investment banking arm, generating more capital that will support more UK lending; and

iii) Creating a smaller bank with reduced costs and a new commitment to become the number one bank for small and medium-sized enterprises—measured by a newly-created independent survey to be run by the Federation of Small Businesses (FSB) and the British Chamber of Commerce (BCC).

This is a key part of rebuilding the banking system and brings us a step closer to returning RBS to the private sector. This is good news for British businesses, for the British taxpayer and for the British economy.

Already as a result of the measures announced today, the Bank of England has confirmed that the taxpayers’ exposure to the banking system can be further reduced by removing the £8 billion contingent capital facility for RBS one year early.

I have always been clear about the Government’s objectives for RBS: to support the British economy, to get the best value for money for the taxpayer, and to set RBS on a path towards return to private ownership. These were the reasons for conducting the bad bank review, which I commissioned in June. The publication of RBS’s new direction and the announcement of an internal bad bank today follows the conclusion of that review.

The review established on the basis of extensive independent advice that the benefits of an external bad bank would be marginal and uncertain. Rothschild advised that the creation of an external bad bank would do more harm than good to RBS as it would not contribute to a capital improvement, would distract management and would produce significant implementation challenges.

In contrast the announcement of this new direction for RBS demonstrates clear benefits: strengthening the firm’s balance sheet, dealing effectively with legacy assets, charting a path to improved profitability and retiring the Dividend Access Share (DAS), which will pave the way for eventual reprivatisation.

This internal bad bank, which will be based on international examples of where similar action has worked, such as the bad bank created by Citigroup in the US will help deliver the Government’s objectives for RBS, but without the extra risks to the taxpayer of an external, taxpayer-funded bad bank.

Rothschild has advised the Government that tackling RBS’s wider issues—the coherence of its strategy and the profitability of its “core” businesses—is as important for meeting the Government’s objectives as tackling its poor-performing legacy assets. It also advised that the new strategy announced by RBS should over time address many of the bank’s challenges and areas of investor concern, which in the longer term should be reflected in an improved valuation and improve the prospects for an earlier return of RBS ownership to the private sector.

When the DAS is retired—on which the Treasury and RBS are now in advanced negotiations with the European Commission—this should also make RBS shares more attractive to external investors and bring forward the day when taxpayers can get their money back.

The Bank of England will play a continuing role in overseeing the implementation of the new direction as part of its ongoing supervision of the firm. The shareholder value implications of this plan have been reviewed by UKFI, who will oversee the development and implementation of RBS’s strategy in line with their mandate to act commercially and in the best interests of the taxpayer as shareholder.