TAKING CONTROL OF RBS PEOPLE-POWERED BANKING THAT PUTS COMMUNITIES FIRST EIGHT YEARS Taking control of RBS and turning it into a network of 130 local banks ON FROM THE would help rebalance the economy FINANCIAL CRISIS, by investing in communities and businesses left behind by our London- RBS IS STILL FAILING centric economic model. ITS CUSTOMERS AND ITS OWNER – 1. THE URGENT NEED FOR THE UK PUBLIC. A NEW ECONOMY The UK’s vote to leave the European Union exposed deep underlying regional divides. Research conducted since the referendum has found that geographical distribution of living standards played a key role in determining how people voted1,2. Part of the reason for this can be found in the UK’s notoriously uneven economic landscape. Figure 1 shows the distribution of output within each EU member state, shown as the spread between their poorest region and their richest. The UK is clearly the most geographically unequal country in the EU. Inner London is the richest single area and sits at the top of the UK’s line, but West Wales and The Valleys, the region at the very bottom of the UK’s graph, is poorer than some recent EU accession countries. NEW ECONOMICS FOUNDATION TAKING CONTROL OF RBS PEOPLE-POWERED BANKING THAT PUTS COMMUNITIES FIRST FIGURE 1: REGIONAL DISPARITIES IN GDP PER CAPITA BY EU MEMBER STATE, 2013/14 (EU28 AVERAGE = 100) 600 500 400 300 200 100 0 ITALY ITALY SPAIN SPAIN MALTA MALTA LATVIA LATVIA SERBIA CYPRUS GREECE GREECE FRANCE SWEDEN AUSTRIA AUSTRIA IRELAND POLAND ICELAND FINLAND ESTONIA ESTONIA BELGIUM BELGIUM CROATIA CROATIA NORWAY NORWAY SLOVAKIA SLOVAKIA SLOVENIA SLOVENIA BULGARIA BULGARIA DENMARK ROMANIA ROMANIA HUNGARY HUNGARY GERMANY LITHUANIA PORTUGAL MACEDONIA MACEDONIA SWITZERLAND LUXEMBOURG LUXEMBOURG NETHERLANDS CZECH REPUBLIC CZECH UNITED KINGDOM KEY: NATIONAL AVERAGE CAPITAL REGION Source: Eurostat3 The last few decades have seen this 2. COMMUNITIES LEFT BEHIND BY gap increase as growth has been OUR GLOBAL ECONOMY driven by financial services in London The growing polarisation of the UK and the South East while many economy has been accompanied communities have been left behind by significant transformation in the by a decline in British industry. The landscape of the financial sector. A result of EU referendum can be viewed wave of mergers and consolidation in as an expression of this economic the late 1960s and early 1970s saw the polarisation, with some describing the UK banking sector become increasingly outcome as a vote “against the London concentrated, and this was further economy”4. accelerated by legislative changes in the mid-to-late 1980s which led to On current trends, things are likely to the decline of Building Societies as a get worse. Many of the communities significant component of the overall that voted to leave have also banking market6. One example of this benefitted the most from EU regional can be seen with the fate of the Trustee development funding, meaning that Savings Banks. In 1976, 20% of the they stand to lose the most from UK population had an account at a leaving the EU5. There is therefore an Trustee Savings Bank and yet by 1986 urgent need to rebalance the economy the sector had been transformed into and promote sustainable economic a single national shareholder bank. In development in areas that have been 1995 it finally disappeared in a merger left behind by our London-centric with Lloyds Bank7. economic model. NEW ECONOMICS FOUNDATION TAKING CONTROL OF RBS PEOPLE-POWERED BANKING THAT PUTS COMMUNITIES FIRST Meanwhile, waves of deregulation local economy. These often take the beginning in the 1970s led to rapid institutional form of co-operatives, growth in financial sector activity and mutuals and public savings banks profitability. The share of total profits (hereafter referred to as ‘stakeholder absorbed by financial corporations, banks’)11. having been very low at around 1% through the 1950s and the 1960s, grew Empirical studies from European substantially from the early 1980s to counties12,13 have shown that the present day, reaching 15% after geographically-limited stakeholder the financial crisis8.The result of this is banks help reduce ‘capital drain’ to that the UK now has among the largest urban centres and thus regional and most concentrated banking sector inequality, and other studies have in the advanced economies, with the shown that such banks direct a much top 3 banks owning over half of all greater proportion of their capital bank assets9. The UK is also unusual towards real economy lending14. in that it lacks a significant local or Local sources of finance are often an regional banking presence – the important determinant for economic market is overwhelmingly dominated development by creating and by national and often internationally retaining wealth regionally rather than orientated banks. Approximately 67%, reinforcing existing geographic lending 57% and 34% of the banking systems imbalances. in Germany, Japan and America respectively are locally controlled, In contrast, UK banking is dominated compared to just 3% in the UK (see by large corporations whose main Figure 2). aim is to maximise shareholder return. Without a focus on specific In other countries local banking geographical areas or social objectives, sectors play a key role in promoting these banks choose to allocate their local economies, and these banks are capital to the most profitable activities, often characterised by stakeholder and lending to local businesses – often ownership and governance – in other involving high transaction costs for words the mission of the bank is not relatively small loans – is less profitable to maximise profits but to optimise than other activities such as mortgage returns to a range of stakeholders, lending and lending to other financial including customers and the broader institutions. The result is that since the FIGURE 2: BANKS’ MARKET SHARES OF DEPOSITS BY GEOGRAPHIC SCALE GERMANY JAPAN UNITED STATES BRAZIL CANADA UNITED KINGDOM 0% 20% 40% 60% 80% 100% KEY: NATIONAL BANKS REGIONAL/ LOCAL BANKS Source: New Economics Foundation10 3 NEW ECONOMICS FOUNDATION TAKING CONTROL OF RBS PEOPLE-POWERED BANKING THAT PUTS COMMUNITIES FIRST mid-1980s the share of lending going By leaving many regions on the to businesses has been falling rapidly, wrong side of the UK’s finance-led and now represents less than 10% of economy, the UK’s homogenous and total lending (see red colour in figure highly concentrated banking sector 3). Meanwhile, lending to financial has contributed towards a lack of institutions for speculative trading has productive investment and growing boosted the profitability of the City, and regional imbalances. Re-establishing a rapid increase in mortgage lending local and regional sources of finance has contributed towards a boom in should therefore be a key priority house prices which are now nine times in addressing these acute regional average incomes across England and imbalances and promoting economic Wales, and up to 20 times incomes in renewal across the country. London and the South East15. FIGURE 3: UK DOMESTIC BANKS – COMPOSITION OF NET LENDING BY INDUSTRIAL SECTOR 100 90 KEY: 80 FINANCIAL SECTOR INSURANCE & PENSIONS 70 OTHER (PUBLIC SECTOR, 60 GOVERNMENT, FUND MANAGEMENT COMPANIES, 50 CENTRAL CREDIT CLEARING) PERCENTAGE 40 PERSONAL UNSECURED PERSONAL SECURED 30 COMMERCIAL REAL ESTATE 20 BUSINESS (NON-REAL ESTATE, 10 NON-FINANCIAL) 0 1986 1997 2008 2014 Source: New Economics Foundation16 Of the business lending that does occur 3. RBS: THE OLD MODEL AND A in the UK, most is heavily concentrated RECORD OF FAILURE in London and surrounding areas. According to the most recent available As a result of the emergency bail-out data, 33% of SME lending goes to package in October 2008, the British London and the South East compared public acquired a majority shareholding to just 8% to Scotland, 5% to Wales and in RBS at a total cost of £45.5 billion. 3% to the North East17. In August 2015 the Government conducted its first RBS share sale since the financial crisis, disposing of a 5.4 per cent stake which raised £2.1bn of proceeds and left the UK government with a 73% stake in the company18. 4 NEW ECONOMICS FOUNDATION TAKING CONTROL OF RBS PEOPLE-POWERED BANKING THAT PUTS COMMUNITIES FIRST In recent years RBS has undergone RBS Global Restructuring Group major restructuring in an attempt to In the wake of the financial crash refocus on its core business. In April more than 12,000 companies were 2014, RBS announced a new strategy pushed into the bank’s controversial to focus on UK retail banking and “turnaround” division – the so-called simplified its structure, grouping its Global Restructuring Group (GRG). activities into three distinct businesses. This division has become notorious for It has also sold its US bank, Citizens its behaviour towards SMEs and has Financial Group, and has transferred for years been accused of deliberately high risk assets into a so-called bad pushing businesses towards insolvency bank – RBS Capital Resolution. In in order to shore up RBS’ own capital order to comply with conditions position, in some cases then buying up attached to the bail-out in 2008, RBS their assets cheaply. also attempted to launch Williams & Glynn – a bank with 314 branches, These accusations have now been approximately £20 billion of loans and substantiated by internal leaked £22 billion of customer deposits – as a documents that were published by new challenger bank. However, after BuzzFeed News and BBC Newsnight years of expensive delays RBS recently on 10 October 201623. The documents announced that it had abandoned show that bank employees were plans to launch it as a new standalone rewarded with higher bonuses based bank and will instead seek to sell on fees collected for “restructuring” 19 the assets and branches to a rival .