THE enforced break-up of Royal Bank of Scotland will make it more difficult for taxpayers to get their money back and will not help consumers, its chief executive Stephen Hester has warned.
On a seismic day for the UK banking sector, Mr Hester said RBS's path to recovery could be impeded by the European Union's insistence on the sale of its most profitable arms.
Analysis: Rabbie Burns could teach the almighty Eurocrats a lesson His warning came after the government announced a world record bail-out for the banking system, worth nearly £40billion, and a major restructuring of the UK's two biggest retail banks, RBS and Lloyds Banking Group. In contrast to Mr Hester's warnings, Chancellor Alistair Darling insisted the reforms represented a good deal for the taxpayer.
The two banks will be forced to sell off a total of 900 branches, while RBS will also have to lose its profitable insurance wing, which includes the Churchill and Direct Line brands. The move means there will no longer be any RBS branches south of the Border – a major blow for what was once the world's biggest bank, the UK's first national branch network and one of Scotland's most iconic institutions.
RBS's seven NatWest branches in Scotland will also be sold. In exchange, RBS will receive a fresh cash injection of £25.5bn from the state, taking the taxpayer's stake in the business to 84 per cent.
Lloyds, meanwhile, will rebrand its branches as Bank of Scotland north of the Border. But it will have to lose 600 branches and pay a £2.5bn fee in exchange for £5.7bn in state cash.
The banks have four years to downsize their operations, but Mr Hester was quick to set out his concerns about the EU ruling. "Customers would be pawns in a bigger game," he told The Scotsman.
Earlier, the RBS chief said that, while he respected the public mood and the EU's rulings, the measures "don't improve competition and don't improve our ability to pay back the shareholder – ie, the taxpayer". While he agreed dismantling some of RBS's branch network could be good for competition, his criticism was aimed at the EU's decision to make it sell other parts of its business.
Q&A: What the RBS break-up will mean for your accountMr Hester is particularly worried that selling off the profitable insurance wing will make it harder to repay taxpayers and will simply be handing a prized asset to another business.
Both RBS and Lloyds yesterday announced major overhauls of their operations, as the government injected tens of billions more pounds into the banks in exchange for a ban on bonuses.
The £39.2bn package was described as a "new world record" for bank bail-outs by the Tories. Under the deal, staff paid more than £39,000 will receive no discretionary cash bonus for 2009, while executive directors will have their bonuses, paid largely in shares, deferred until 2012.
Mr Hester admitted this would make it more difficult to retain and recruit staff. The changes had left RBS feeling "bruised", he said, adding: "We do feel that life has in many ways been made more difficult for us. However, we have a job to do and we will get on with doing it."
As part of the package, RBS will be able to draw on an extra £8bn contingency if the markets deteriorated further. But a further, less publicised, perk will be tax write-offs worth up to £11bn a year for the bank. In exchange, it will have to pay a hefty £700 million a year to be covered by the government's "toxic" insurance, known as the Asset Protection Scheme (APS).
Lloyds has managed to avoid going into the scheme, and will instead seek to raise funds from shareholders. Lloyds chief executive Eric Daniels was sanguine about the restrictions on bonuses, saying: "Rewards have to be taken over the same sort of timeline as the period of risk."
Opposition parties said the latest help from the state was an even bigger bail-out than last autumn's cash injection.
But the Chancellor insisted the shake-up would be good for British taxpayers and banking customers. "These changes are better for the taxpayer, better for the banks and better for the economy," Mr Darling told MPs. "They will mean stronger and safer banks better able to support the recovery."
In a Commons statement, he said the changes would potentially create three new high street banks over the next five years. He added that fears of a global depression had receded and "market confidence" had started to return.
Shadow chancellor George Osborne said the latest rescue package would cost £2,000 per family and described it a "new world record as the single biggest bail-out of any single bank anywhere in the globe". He also said there was no guarantee it would get credit flowing in the economy.
Liberal Democrat Treasury spokesman Vince Cable questioned why anyone in the two banks should receive any bonus at all – even a deferred one.
"A bonus is surely a bonus whether it is paid now or in three years' time, and why do you and the Tories think it is great discipline and hardship to ask the bankers to wait three years for their Ferraris?" he said in the Commons.
SNP Treasury spokesman Stewart Hosie warned that the disposal of certain divisions of Lloyds and RBS could impact on jobs in Scotland.
Mr Darling said the government would "do everything it can" to protect jobs, and added there would have been "huge consequences" for the two banks if ministers had not intervened.
The Unite union warned that thousands of jobs were at risk. Its national officer, Rob MacGregor, said: "We cannot allow a situation to arise where some 25,000 loyal workers in bank branches in high streets and towns across the country are made to pay the price for the banking executives' recklessness.
"Any potential buyers should be assessed on their commitment to job security and protection of terms and conditions, not short-term profits."
Finance secretary John Swinney has written to Mr Darling and EU competition commissioner Neelie Kroes expressing his concerns over the break-up of the Scottish banks. He asked them to remember the importance of the financial sector in Scotland and to make sure that any restructuring supported jobs in the sector.
He said: "Restructuring must be handled in a way which ensures value for money for taxpayers to receive a fair return on the significant investments that have been made. Any restructuring must also occur in a manner which supports the wider Scottish economy, particularly in assisting the development and growth of viable businesses."
Shares in RBS nosedived on the shake-up announcement, but Lloyds' picked up because the bank had managed to avoid being dragged into the asset protection scheme.
Lloyds in ScotlandLLOYDS Banking Group will become Scotland's biggest employer in the financial services industry after the dramatic overhaul of it and rival Royal Bank of Scotland.
Its slimmed-down operation will be known as Bank of Scotland – a return to the iconic brand before it became HBOS (Halifax Bank of Scotland).
About 20,000 staff will be employed by Lloyds in Scotland and its registered office will remain at the Mound in Edinburgh.
The TSB brand will be sold, along with some Lloyds TSB branches in England. Lloyds will also sell its four Scottish branches of Cheltenham & Gloucester and the Intelligence Finance internet operation, based in Livingston and Rosyth.
There has been strong speculation that a consortium of Scottish businessmen could bid to take over TSB Scotland to create an independent Scottish bank.
Yesterday, Scottish Secretary Jim Murphy said he wanted to meet "serious" investors considering buying the Lloyds and RBS assets.
He also pledged to fight for "the best possible deal for Scotland" for jobs and facilities.
"I want to see as many banking jobs and HQ facilities as possible in Scotland," he said. "I will meet with serious potential investors considering buying the retail banking assets."
