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RBS is not the only victim of its reckless behaviour

Last survivor of Britain's trustee savings banks set to close down.


Today the 73% taxpayer-owned Royal Bank of Scotland (RBS) set aside a further £3.1 billion to cover expected fines from the US Department of Justice. The provision relates to the misselling of residential mortgage-backed securities (RMBS) before the 2008 financial crisis.

For RBS, large fines are nothing new. Between 2011 and 2015 the bank paid out £14.7 billion in fines, legal bills and customer compensation covering a range of activities including foreign exchange trading and rate-setting activities, London Interbank Offered Rate (LIBOR) fixing, product misselling (including misselling of Payment Protection Insurance), treatment of SME customers in financial difficulty, and money laundering.

The bank is also potentially facing large litigation costs resulting from the activities of the so-called Global Restructuring Group (GRG), which has been accused of deliberately pushing businesses towards insolvency in order to shore up RBS’ own capital position, in some cases then buying up their assets cheaply.

The company has now run eight successive years of losses amounting to a total of £50 billion since being bailed out by the taxpayer in 2008 at a total cost of £45.5 billion.

But it is not just the big banks that have been made to pay for their reckless behaviour. Last week it was announced that the last survivor of Britain’s trustee savings banks – Airdrie Savings Bank – is to close down.

Trustee savings banks were first legally recognised in the UK in 1817. They started in Scotland, but swiftly became popular institutions across the country. The bank assets were unowned and managed by trustees.

As late as 1976, 20% of the UK population had an account at a savings bank. However, following a wave of government enforced mergers and consolidation, by 1986 the sector had been transformed into a single national shareholder bank. In 1995 it finally disappeared in a merger with Lloyds Bank. Only one savings bank, the Airdrie Savings Bank, survived this process and remained an independent savings bank.

But last week’s announcement that the bank is to close spells the end for local savings banking in the UK. The main reason cited for the closure is the cost of new regulation introduced since the financial crisis, which has proved too great for small lenders.

This is despite clear international evidence showing that local savings banks perform better than their large competitors on measures of financial stability, local economic development, business lending, and financial inclusion.

It’s important to stress that this isn’t a sign post-crisis regulation went too far’ in trying to make big banks safer: in fact, most commentators agree it didn’t go nearly far enough. The problem was the approach. Instead of hard hitting structural reform to break up too-big-to-fail banks and nurture more socially beneficial forms of banking, we have seen a raft of highly complex regulations designed to police the activities of big banks while leaving their business models largely intact.

Indeed, bank lobbyists often pushed to make regulations more complex by lobbying for various exceptions and caveats to prevent the new rules hurting their bottom lines. Not surprisingly, regulations made in the image of big banks have tended to work in big banks’ favour, and it’s their smaller rivals who’ve been hit hardest. Despite playing no role in the financial crisis, small institutions such as the Airdrie Savings Bank have been forced to comply with new regulation designed to curtail the risks posed by global, systemically important banks.

By failing to recognise the distinctive nature of local savings banks, policymakers have unwittingly killed them off. The Airdrie Savings Bank has become just the latest victim of the reckless behaviour of the big banks. Not only is this not fair – it also makes no economic sense.

Over the next few months the New Economics Foundation will be reviewing the policy landscape and identifying how stakeholder banks could be supported to compete more effectively with incumbent shareholder banks. The outcome of this work will be recommendations aimed at promoting banking diversity and, hopefully, stimulating the rebirth of a vibrant savings banking sector.

In doing this, we can begin to transform our broken banking system into one that works for the people.

If you value great public services, protecting the planet and reducing inequality, please support NEF today.


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