Royal Bank of Scotland

Ian Blackford Excerpts

Thursday 5th November 2015 Commons Chamber

[Jon Cruddas]

A collective hit of £14 billion on taxpayers does not seem to be good, rigorous or empirically grounded economics, so my hon. Friend is absolutely right.

Let me return to the question of bank deposits. Apart from anything else, the lack of diversity in the UK’s banking system leaves us extremely vulnerable; all our eggs are literally in one basket. If we look at the international evidence on how those different types of bank perform, it quickly becomes clear that the Minister’s claims simply do not stack up.

Let us take shareholder owned banks first. Let us not forget that in 2008 it was shareholder-owned commercial banks that brought the global financial system to its knees. Yes, they were “innovative”—they created some of the most innovative toxic financial instruments the world has ever seen—but much of that innovation was what Adair Turner has termed “socially useless”; it served no real economic purpose except to inflate the profits of the banks that produced them while quietly spreading dangerous levels of risk to every corner of our financial system.

Members do not have to take my word for that. The Parliamentary Commission on Banking Standards concluded that the shareholder model itself had a large part to play in the story:

“Shareholders have incentives to encourage directors to pursue high risk strategies in pursuit of short-term returns... In the run-up to the financial crisis, shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism.”

In other words, the ownership model to which the Government are so keen to return RBS is the same model that helped to bring the bank down in the first place.

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

Perhaps the hon. Gentleman could remind the House which party was in government when the financial crisis took place and what it was doing with the regulator.

[Jon Cruddas]

Labour was in government, and many of us were arguing that we should have created this opportunity to diversify forms of banking products. The hon. Gentleman might have meant the debate about the future of the Post Office, and many of our colleagues were involved in trying to articulate the case for a Post Office bank that could offer robust, bona fide financial products to communities such as mine, which were being vacated by the big commercial banks. We have a consistent theme developing among the contributions from the Opposition side of the House, and it is not an either/or political point-scoring exercise.

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[Mr Baker]

The hon. Gentleman knows that I often agree with him, but on this point I do not. I am an old English liberal free trader and I think that the fundamental problem is the chronically inflationary system of fiat money. I hope that he will forgive me if I talk instead about the Royal Bank of Scotland, because I have put the other issues on the record since my maiden speech.

I have two long-standing misgivings that come to a head in RBS. The first is about the effect that the international financial reporting standards have on our ability to see the true and fair position of banks. The other is about the stress tests. I am grateful to Professor Kevin Dowd, Gordon Kerr and John Butler of Cobden Partners for their advice, but any errors or omissions are my own. I should say that I have no financial interest whatever in Cobden Partners, although it was a spin-out from the Cobden Centre, which I co-founded to advance the ideas on which they are now working.

I have said many times that the IFRS allow, enable and encourage banks to overstate their asset values, and therefore their profits, and to understate their losses. In May, we conducted an exercise in which we compared the accounts of RBS with the statement of its accounts in the asset protection scheme. We believed that its capital was overstated by £20 billion. We had a meeting with RBS at which that was admitted.

If it is the case that the IFRS encourage banks to overstate their capital positions to such an extreme degree, I am not in the least convinced that we are selling something that we truly understand. Indeed, as the hon. Member for Edmonton (Kate Osamor) was opening the debate, on which I congratulate her, Gordon Kerr texted me to say that if we broke up the bank into 130 pieces, it would reveal its insolvency. I am not asserting the insolvency of RBS; what I am saying is that with the IFRS the way they are, we simply cannot know whether RBS is in the position it appears to be in.

In such circumstances, the paying of dividends, which has been proposed, would be extremely unwise. It would risk exposing taxpayers to future claims from stakeholders ranking superior to those common stakeholders. The claim will be that their entitlements have been improperly paid out as dividends, when those funds should lawfully have been held back and attributed to creditors and depositors. Tim Bush of Pensions & Investment Research Consultants, Gordon Kerr and others argue that we should have strong reservations about the integrity of the numbers and the ability of the firm to distribute profits under the law.

[Ian Blackford]

The hon. Gentleman is painting an interesting picture of the deficiencies of the IFRS. If we believe it for a second, does it not behove the Government to do a proper analysis of the true value of Royal Bank of Scotland, given that we own over 70% of it?

[Mr Baker]

I banged on in the last Parliament about the IFRS and their shortcomings. Indeed, I introduced a Bill to require parallel accounts to use the UK generally accepted accounting principles, precisely because I think there is a serious problem. I refer the House to Gordon Kerr’s book “The Law of Opposites”, published by the Adam Smith Institute, which not only covers this problem in detail, but explains how it feeds into the problem of derivatives being used specifically to manufacture capital out of thin air to circumvent regulatory capital rules. That is an extremely serious problem that might mean that the entire banking system is in a far worse place than we might otherwise think.

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[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

It is a pleasure to speak in this debate. I should declare that I am an ex-banker but one reformed, once described as a humble crofter on the Isle of Skye.

[Calum Kerr (Berwickshire, Roxburgh and Selkirk) (SNP)]

Never humble!

[Ian Blackford]

I thank my hon. Friend.

I am grateful to the hon. Member for Edmonton (Kate Osamor) for securing this important debate, and I commend the hon. Member for Wycombe (Mr Baker) who provided the House with great detail about how he views the financial issues surrounding the Royal Bank of Scotland.

We keep hearing from the Government about their long-term economic plan, but to have any kind of effective economic plan we need a dynamic banking sector that is fit for purpose and engages in appropriate and responsible consumer and business lending. It is therefore important that we pay cognisance to what is happening to the money supply, and in particular the definition of broad money or M4.

Figures released by the Bank of England for the year to end September 2015 are a cause of some concern. Money supply fell by 0.6%, although I concede that that was largely a result of a fall in wholesale deposits. Worryingly, however, lending fell by 0.1%. There is concern that availability to bank lending for businesses and consumers is running below the rate that can be considered sustainable, and certainly below the level that is consistent with the delivery of sustainable economic growth.

There is also a legitimate debate about what kind of lending we should have, and about interaction with savers—many speakers have already raised that point. We must encourage industrial and commercial investment that focuses on innovation and skills, driving up wages and living standards, and we must have less focus on consumer debt. In Scotland, Scottish Enterprise has a limited but successful investment bank, and we must consider how to support and grow that model elsewhere in the UK.

[Jeremy Quin]

rose—

[Ian Blackford]

I will happily give way to my hon. Friend.

[Jeremy Quin]

I am grateful to be called an hon. Friend by the hon. Gentleman. I accept his point about the types of lending taking place. Does he share my concern that in making many banking decisions, bankers enjoy having an asset that they can grab hold of—a house, perhaps, or something that they can see, touch and feel? We are considering cash-flow projections. Perhaps this issue comes down to the heart of training inside banks, because to be comfortable with some of the new technologies and innovations, they must be able to understand those cash-flow projections exactly.

[Ian Blackford]

I agree with the hon. Gentleman and I could probably bang on about that issue for a considerable time. He is right. Banks that are lending, particularly to the business community, must understand the businesses to which they are lending. Too often that has been done by matrix, spreadsheets and ticking boxes, and not through a clear understanding of where the growth opportunities are in the economy. That must change, which is why I referred to the investment bank in Scottish Enterprise. We need sectoral skills and an understanding of where growth opportunities are in the economy. There must be more of an alignment of the interests of the country, the Government and the banks, and an appreciation of what we need to do to deliver long-term and sustainable growth.

[Guto Bebb]

The hon. Gentleman mentioned the investment bank in Scottish Enterprise. Wales has a similar institution, Finance Wales, which is operated by the Welsh Government. It charges penal rates of interest. Will the hon. Gentleman mention the rates of interest charged by the similar organisation in Scotland?

[Ian Blackford]

I confess that I am not aware of the individual rates charged, but the investment bank in Scottish Enterprise is quite constrained by its access to capital. I hate to make this point, but if the Scottish Parliament had more powers, it would increase our ability to ensure that that investment bank was properly funded.

We all understand the importance of improving capital ratios and establishing a more sustainable banking platform, but at the same time there has been a choking-off of credit to businesses and consumers, restraining our ability to grow our economy. The need for quantitative easing was clear, but it is right to ask how wider society has benefited from the Bank of England’s £375 billion asset purchase scheme.

Quantitative easing demonstrably helped the banks, but it has not fed through to greater activity to help the wider economy. If we contrast that with the pre-financial crash period between 2006-8, we see that M4 was increasing at an annual rate of close to 15%—levels that should have made alarm bells ring in the Government and the regulator at that time. Today we are living with the consequences of that failure, and that is why we are having this debate. The issue of banks being too big to fail, and the dislocation that took place in our economy as a result of the financial crisis, meant that the public were, rightly, angry at the behaviour of those responsible. We cannot and must not return to the circumstances that led to that crisis.

Of course, none of this was unprecedented. There was a significant banking crisis in the UK in the 1870s. It took a long time to recover from that crisis, and at the time it led to substantial change. In the US the Glass-Steagall Act was introduced in 1933. It prohibited commercial banks from participating in investment banking after the excesses of the 1920s, and that legislation remained in place until repeal under President Clinton. The Glass-Steagall Act was introduced for good reasons, and in my opinion its repeal added to the toxic cocktail that led to the financial crisis of 2007-08. In that context it is right to debate the relationship between commercial and investment banking, although we seem to have settled on ring-fencing as a solution to the challenges.

I understand why many people have supported ring-fencing, and perhaps it is worthy of ongoing debate. We know, however, that investment banking was not the only source of the financial exuberance that brought our economy to its knees. It is worth remembering that Northern Rock was the first failure in this country. That bank had absolutely no exposure to investment banking, and, as was the case elsewhere, simple bad practice—or indeed malpractice—was the issue. We must ask whether it is necessary or appropriate for our commercial banks, such as Royal Bank of Scotland, to engage in investment banking. There is no question but that we need a thriving investment banking industry in this country, and it remains today a source of jobs and wealth. The critical question, however, is whether such practices are appropriate for our high-street banks.

[Jeremy Quin]

I am pleased that the hon. Gentleman referred to the Overend and Gurney banking crisis of the 1870s and—this follows on from the remarks by my hon. Friend the Member for Wycombe (Mr Baker)—I believe it was only because of that crisis that banks had to report their accounts at all. Before that, such disclosure was regarded as rather a bad thing for a bank to do, because people might not trust it if it had to state exactly what its assets were.

On the investment banking arm of the Royal Bank of Scotland, does the hon. Gentleman think it appropriate for a commercial bank to provide investment banking capabilities to its corporate clients? There are many legitimate things about investment banking, such as foreign exchange providing support for exports, and derivatives are not always a bad thing—there are things they can do to help the export industry. There may be a synergy there, and I would be interested to hear the hon. Gentleman’s remarks.

[Ian Blackford]

I appreciate that there is an issue regarding what can be defined as investment banking. Of course corporate banking clients at RBS would require some of those facilities, but it is a question of how it is done.

On 13 October the headline on the BBC was “Will Barclays make another push into Casino banking?” That is the real issue. We can debate and discuss the frailties that still exist in the Royal Bank of Scotland, and what it needs to do to improve its balance sheet, but when banks are in a better position than they are today and have strengthened balance sheets, what would prevent the likes of RBS—even in a ring-fenced scenario—from putting additional capital into investment banking? That is the problem. Over the past two or three decades the seductive charms of investment banking have led to investment banks going down that road. We must be careful about that and debate the best way we in Parliament can ensure effective regulation. It never worked. It was a fantasy. Sad to say, it could become a fantasy for many more in the years to come. We do not need our high-street banks to become casino banks, and if necessary we will need legislation to enforce that. Lessons must be learned. No more can the country be held to ransom.

I am conscious that others wish to speak, so in the short time I have left let me turn specifically to RBS. I want to see RBS back in private hands, but not at any price. As the motion sets out, there ought to be a wider review of the UK financial sector. We own RBS collectively and we have a duty of stewardship to make sure that it is fit for purpose for the decades to come. There needs to be a debate on this before the Treasury and UKFI unwind our position. We have a duty, having bailed RBS out, to get the best value for the taxpayer. I am delighted to support the motion.

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[George Kerevan (East Lothian) (SNP)]

I associate myself with the comments from hon. Members congratulating the hon. Member for Edmonton (Kate Osamor) on securing the debate. The advantage of having this debate is that we have moved the agenda forward, rather than looking back. Yes, we have castigated and held RBS to account, but the Minister should also note that Members on both sides of the House want to move the banking agenda forward.

We have spent seven or eight years, in the Treasury Committee and in the House, trying to refashion the regulatory machinery. In fact, the new regulatory machinery is yet to come into force, because it will be another two years before most of Vickers and the ring-fencing is in force, and another four years before it is fully operational. That means that we will have spent more than a decade trying to sort out the problems of 2007, and when we get there, we will discover that economic and banking problems have moved forward. Therefore, the advantage of today’s debate is that we have tried to start moving the agenda beyond 2007. I think that the Government should bear that in mind. That is why the motion, despite being drafted in very general terms, expresses the will of the House, which is that we need to look forward at how we can make the banking system more responsive, rather than simply protecting it from replicating the previous bubble.

I associate myself with the words of the hon. Member for Horsham (Jeremy Quin) and my hon. Friend the Member for Caithness, Sutherland and Easter Ross (Dr Monaghan). In criticising the strategy pursued by various managements of RBS, which hopefully was largely in the past, we should never extend the criticism to the work done by the ordinary workers in the branches and call centres. They have struggled to cope with the crisis of 2007-08, and with the various restructurings that have taken place. I remind Members that employment in RBS was around 200,000 when it was taken into public ownership, and now it is about 92,000, so there has been a massive shedding of labour.

[Ian Blackford]

It is interesting that my hon. Friend is referring to the challenges that some of the staff at Royal Bank of Scotland have faced. They are fully deserving of our support. Does he agree that we should reflect on the employees of RBS and other banks who were encouraged by their managements to own shares pre-the crisis, and who, among others, have suffered parlously from the mistakes by those managements?

[George Kerevan]

My hon. Friend, and old friend, makes a very good point. There is not a wall between the customer and the rank and file staff of RBS; they too are customers and shareholders, and they too suffered.

That brings me to where we go next. I do not think that Members of this House would stand in the way of returning RBS to private ownership. When the Minister replies, she must not define our difference of opinion as being that the Government support a return to private ownership while the rest of us are demanding that RBS stay in the public sector. That is not the issue. The issue is the emphasis placed by the Treasury and the various Treasury agents in their approach to the various generations of management in RBS. In public ownership, the key goal given to RBS management was to pay down the level of debt—to reduce the balance sheet. During that period, RBS reduced its balance sheet by some £1.3 trillion. To put that in numbers that people can understand, it is equivalent to the entire balance sheet of Lloyds plus the entire balance sheet of Standard Chartered.

Achieving that has required the management of RBS to focus only on internal issues. Of all the weaknesses that have been identified by Members—I agree with all of them—the central weakness is that the management has concentrated on RBS’s problems and not on the customer. I will explain how I would crystallise this debate for the Minister. In choosing when and how to send RBS back to private ownership, the test must not be, “Did we get all our money back? Is the Treasury satisfied? Has the balance sheet been paid down to a certain amount?”; it must be the impact on the customer and whether RBS has returned to a customer-led focus. I think that the current chief executive, Ross McEwan, and his staff are struggling to do that. Since the senior management was changed two years ago, there has been some refocusing. I remind the Minister that the proximate reason for the change in chief executive was that the then chief executive had disagreed with the pressure that he was being put under to get the bank ready for full privatisation when he was saying, “No, we need to restructure in favour of getting the bank ready to meet the needs of the customer.” The test is not about ideological machismo—are we in favour of private ownership or public ownership?—but the fact that the bank can be privatised and move forward only when it is capable of winning back its customers and its customers’ confidence.

The fundamental break with RBS’s customers has been the loss of faith of its small business customers. That has not changed; we have heard a number of examples today. Whether or not RBS was ultimately culpable, through the global restructuring group, in driving viable businesses to the wall, that is what RBS’s customers feel happened. Until that is resolved, the bank will never become the bank that we all want that can drive the economy forward.

The Government have to be very careful about how they approach privatisation in case they further break the confidence of small businesses. In August, when there was the first wave of privatisation in which the Government started to sell off their shares, that produced bad headlines yet again. I personally think there was evidence of short selling. The Treasury certainly lost more money than it needed to in trying to sell off 5% of shares. That brought further bad headlines, which cannot be allowed to happen again.

At this stage in the game, after seven to eight years of constant restructuring at RBS, it will not be easy to start again and ask RBS management and staff to have a whole new business model. We might come to that point, but I give a word of caution. If we look at the long and sorry history of the attempt to hive off Williams & Glyn, which is a disaster still waiting to happen, we will see that it is not possible simply to wave a magic wand and break up RBS into a dozen or so regional banks. I believe we need to create regional and stakeholder banks, but breaking up RBS may be more difficult than some Members imagine.

Williams & Glyn was not a standalone bank—it was a brand that was totally integrated into RBS. Hiving it off again has taken so long that the original investor, Santander, walked away. The RBS management has been forced to enter into a bizarre arrangement with Corsair Capital, which is an interesting name for the partner RBS has joined in order to bring in capital to Williams & Glyn and then float it off. I do not think that RBS will make any money when it is floated off, so the taxpayer and the Treasury will not get any more money back. Corsair Capital is an American group with a long history of consolidation in the banking world, so I do not think it will be very long before Williams & Glyn is bought by somebody else, precisely so that the Corsair group makes a return on its money and effort. In the end, therefore, we will be no further forward when it comes to small businesses.

I am being chided by you, Madam Deputy Speaker, so I will be brief in offering some practical suggestions.

[Ian Blackford]

Will my hon. Friend give way?

[George Kerevan]

I will not take another intervention, because I am mindful of the time.

The Government have to rethink the idea of extending the new bank surcharge, which they have applied to the larger banks, to the smaller banks and mutuals. If we want to strengthen the mutual stakeholder section, we need to reduce the bank surcharge on it.

There is a growing issue—we have not mentioned this today, but it is beginning to emerge in the banking community—of access to the interlink payment system that binds together all the banks. The electronic system, which relates to cashline machines, standing order payments and contactless payments in a shop, is commonly owned by the big banks, but it is very difficult for smaller banks, new challenger banks and, ultimately, stakeholder banks to access it. We need to open it up. Finally, we need to open up the pricing structure so that SMEs can see how much it costs them to run accounts with a bank

Members on both sides of the House have collectively offered suggestions to the Government. There should be no rush to judgment. Let us think about what we are doing. RBS must have a customer-led focus and we should not just look at what the Treasury wants to do in order to get its money back.