George Osborne has called time on Royal Bank of Scotland’s ambitions to be a force in global investment banking, as the chancellor backed sweeping reforms to ensure taxpayers never again have to rescue the banks.
In an attempt to fend off criticism that the government had watered down measures proposed by Sir John Vickers, he told the state-backed bank to return to its roots as a UK-focused lender.
The chancellor said RBS’s future was in personal, small business and corporate banking and that it would scale back “riskier activities that are heavy users of capital or funding”.
The surprise comments came as Osborne pledged to implement the proposals put forward in September by Sir John’s Independent Commission on Banking, with few compromises.
These reforms will force British banks to build a wall around their core UK high-street and small business operations and buttress them with an additional layer of equity capital.
“The face and structure of banking has changed for good and we’ve reached a point of no return,” said Jon Pain, UK head of financial services risk consulting at KPMG, the accountancy group.
But in a sign that the government had succumbed to threats from HSBC that it could leave the UK if regulatory costs rose too high, Osborne said banks could avoid tough capital rules on their international operations as long as they did not pose a risk to British taxpayers.
Osborne took a more assertive stance with RBS, wielding his power as its largest shareholder to back a radical restructuring of the bank.
He also reiterated calls forrestraint on bonuses, saying the government had made it “very clear” that the pool next year must be lower than last.
RBS was already planning to shrink its investment banking division by up to 50 per cent — potentially triggering thousands of job cuts — as a way to slash costs and free up more capital.
“The government never wanted this business, they never understood this business,” said one senior RBS investment banker. “What they’re going to realise is that without global banking and markets, RBS as a ‘utility bank’ isn’t a very good business. The emperor’s clothes will be stripped off.”
Treasury officials said shrinking the investment bank had “no immediate impact” on the timing of any privatization of the bank. “That is based on securing the best value for the taxpayer,” the official said.