In October 2008 one of the most significant telephone calls in banking history occurred. The chairman of RBS telephoned the Chancellor of the Exchequer. The chairman confirmed that the bank had run out of money and demanded to know what the Chancellor
would do about it. RBS controlled assets in the UK of nearly £1.5 trillion. Had it closed that night – as any other company would have had to do – the resulting collapse in the UK economy would have been irreparable. The failure of Greece’s economy is an
outline of what would have happened to the UK.
RBS had simply lent too much money to too many people and businesses and taken, in return, security that was no longer able to absorb the collapsing of the world economy, which had started in 2007 and accelerated in 2008. Northern Rock had done the same and
the UK Government had had to nationalise it. The Government had no option. Interest rates plummeted and the Government had to find huge reserves of cash to bail out RBS. Then Lloyds also needed a bail out, as a consequence of buying the Bank of Scotland,
which had a very similar lending practice as RBS.
A number of reviews took place into what the banks should do with the toxic assets they had. RBS had £258 billion of toxic assets, known as “non-core” assets. A 2013 review found that RBS was still unable to restructure properly and was still in financial
Throughout the 2008 to 2014 period RBS and Lloyds used various means to remove “non-core” assets from their balance sheets. The FCA initiated a review into RBS’s removal of non-core lending. 16 months later we still do not know when this will be issued.
Following the 2013 “Bad Bank” review, RBS announced the creation of an “internal bad bank” within which £38 billion of its highest risk assets would sit. The Bank undertook to remove these assets before the end of 2016. The bad bank is called RBS Capital
Resolution. RBS has informed RCR customers that they expect them to work with the Bank to affect a consensual sale of those assets even if the terms of the lending arrangement have been kept to. What if the customer will not dispose of those assets voluntarily?
“In extremis” the Bank say they will sell the loan to a third party. Enter the vulture fund as we have seen before with the introduction of Cerberus in the Lloyds “Project East” portfolio sale. Clearly signing up to a banking relationship means nothing when
one party can withdraw when it suits their wider policy.
The Bank has kept to most of its promises and has steadily remove tens of billions of pounds of assets from its balance sheet. Removal of RBS from its Government support was seen as unlikely this year and next year due to the on-going challenge of removing
riskier assets. However, following the surprise majority of the Conservative Government there is considerable media suggestions that HM Treasury sell RBS shares,
despite that they will create an approximate £13.5 billion loss for the UK Government.
(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of this article.)