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Public Accountability and Crisis in the Banking Sector The Case of the UK Elisa Henderson Doctor of Philosophy The University of Edinburgh 2014 Declaration Page Declaration This is to certify that that the work contained within has been composed by me and is entirely my own work. No part of this thesis has been submitted for any other degree or professional qualification. Signed: Dedication I dedicate this thesis to the memory of Fraser Timothy Henderson, stillborn 29th March 2014. “I loved the Boy with the utmost love of which my soul is capable, and he is taken from me – yet in the agony of my spirit in surrendering such a treasure I feel a thousand times richer than if I had never possessed it.” (Wordsworth, 1812) Abstract The marked disintegration of the UK banking system in 2008 led to significant Government ownership in two major banks: The Royal Bank of Scotland (RBS) and Lloyds Banking Group (LBG) (National Audit Office, 2009). The banks are termed ‘quasi-nationalised’ due to the retention of stock exchange listings alongside Government ownership The thesis offers a documentary analysis on the public accountability of these banks. The research themes are: The impact of Government intervention on the accountability of the quasi- nationalised banks The banking crisis through the lens of financial reporting for RBS and LBG Newspaper reporting of the banking crisis in RBS and LBG A multiple theory framework is utilised in the study. Property rights (Alchian, 1974; Alchian and Demsetz, 1973; Demsetz, 1967) and agency theory (Fama, 1980; Jensen and Meckling, 1976) explore the implications of Government Intervention. Impression Management and Stigma (Goffman, 1968; Goffman, 1956a) are used to critique financial reporting since the crisis. Critical Discourse Analysis assesses newspaper reporting of the banks’ finances (Fairclough, 2010; Fairclough, 1995). Summary findings for the three research themes are as follows. Quasi-nationalisation has been a positive response to the banking crisis. Banks acknowledge they must consider societal responsibilities as well as corporate profits. Yet the increased accountability mechanisms have been difficult to define and enforce. Property rights theory applauds the retention of private sector scrutiny. Agency theory, however, identifies the muted disciplinary effects of the markets in the circumstances. The banks’ financial reporting gives an alternative perspective on the banking crisis. Both banks acknowledge their role in the crisis but simultaneously distance themselves from it. RBS highlights the virtues of a ‘new’ bank different from the failed one. LBG explains poor results through ‘market dislocation’. The statutory accounts themselves are relegated in favour of managerially defined pro forma numbers and promotional materials. In this way, the statutory numbers can be seen as part of the ‘dirty work’ (Goffman, 1956b) of the crisis. Using critical discourse analysis (Fairclough, 2010; Fairclough, 1995), findings are that newspaper reporting of the banks’ accounting results occurs across a broad spectrum of titles and articles. Headlines favour big numbers for impact. But constant focus on banking pay endures. The accounts provide an important counterpoint to the news context of the banks. Positively, accounting is portrayed as a neutral challenger to the public relations news process and fulfils democratic accountability. Critically, however, it is in the interests of papers to create and sustain media panics (Leach, 2006). The thesis responds to calls for literature on the financial crisis (British Accounting Review, 2012; Journal of Accounting and Public Policy, 2011; Arnold, 2009), multi- theoretical research in the public sector (Jacobs, 2012; Kurunmäki et al., 2003), linguistic theory in accounting (Evans, 2010) and accounting in the tabloids (Jeacle, 2012) as well as interpretive research in financial reporting (London School of Economics, 2011; Brennan and Solomon, 2008; Parker, 2007). Contents Public Accountability and Crisis in the Banking Sector ............................................................ The Case of the UK ................................................................................................................ Declaration Page ...................................................................................................................... ii Dedication ............................................................................................................................... iii Abstract ............................................................................................................................... iv List of Tables and Figures ....................................................................................................... ix List of Tables .................................................................................................................. ix List of Figures ................................................................................................................. ix List of Abbreviations ............................................................................................................... x Acknowledgements ................................................................................................................. xi Chapter 1: Introduction ............................................................................................................ 1 1.1 The Beginnings of the Banking Crisis: Northern Rock ................................................. 1 1.2 The Height of Crisis: September and October 2008 ...................................................... 2 1.2.1 RBS ......................................................................................................................... 2 1.2.2 HBOS and Lloyds Banking Group ......................................................................... 3 1.3 Government Intervention in HBOS, Lloyds and RBS ................................................... 3 1.4 Rationale for Investigation ............................................................................................. 5 1.5 Research Themes and Rationale .................................................................................... 6 1.6 Contribution ................................................................................................................... 8 1.7 Structure of the Thesis ................................................................................................... 9 Chapter 2: Crisis, the Banking System and Accounting ........................................................ 11 2.1 Financial Crisis and Corporate Failure are Regular Phenomena ................................. 11 2.2 States Expose Corporate Failure .................................................................................. 14 2.3 Accounting Regulation Used as an Instrument to Pursue State Ends .......................... 15 2.4 Controversies in Accounting during the Global Financial Crisis: An Overview ......... 18 2.4.1 The Historical Context of the 2008 Regulatory Developments ............................ 19 2.5 Concluding Remarks .................................................................................................... 21 Chapter 3: Nationalisation in the UK ..................................................................................... 22 3.1 Bank Failures and Bank Nationalisations .................................................................... 22 3.2 ‘Old’ Labour and Nationalisation ................................................................................ 24 3.3 Nationalising Industry, but not Banking ...................................................................... 25 3.4 Privatisation of SOEs ................................................................................................... 26 3.5 Nationalised Industries: An Assessment ...................................................................... 26 3.6 Efficiency of SOEs ...................................................................................................... 27 3.7 Public Accountability of the SOE ................................................................................ 28 3.8 Ministerial Interference ................................................................................................ 29 3.9 Concluding Remarks .................................................................................................... 30 Chapter 4: Theoretical Frameworks ....................................................................................... 31 4.1 Property Rights Theory ...............................................................................................