Financial News

  • 8 October 2012, 12:14

Exclusive: RBS Faces New Shake-Up

Royal Bank of Scotland (RBS) is coming under renewed pressure to scale back its investment banking arm as it seeks to exit a costly Government insurance scheme.

I have learned that the taxpayer-backed bank is being urged to shrink its global banking and markets (GBM) division, as well as to reconsider its ownership of Citizens, the giant US retail bank.

RBS is resisting the pressure, which has emerged in recent weeks as the bank attempts to finalise its departure from the Asset Protection Scheme (APS).

The APS was set up in the aftermath of RBS's rescue in 2008 to insure more than 300bn of toxic assets on the bank's balance sheet.

RBS has since wound down or sold the vast majority of those loans. The insurance scheme is now worthless, since the bank will never be able to claim under it, but is costing RBS a 500m annual premium.

Executives at the bank have been asked to revisit its presence in investment banking as well as to assess whether RBS's value would be enhanced by selling Citizens.

I understand that the latest demands were made through UK Financial Investments (UKFI), the body set up to manage the Government's shareholdings in bailed-out banks.

George Osborne, the Chancellor, is aware of the discussions between RBS and UKFI and is thought to be keen to extract material concessions from the bank before it is allowed to leave the APS.

"Neither the Treasury nor the Financial Services Authority (FSA) wants to give the bank a free pass to exiting the scheme," a person close to the talks said.

The Government's strategy for realising value from the taxpayer-backed banks is likely to be one of many economy-related subjects likely to be discussed at the Conservatives' autumn conference, which starts in Birmingham tomorrow.

RBS has already shrunk its investment bank, selling and shutting significant divisions and shedding tens of thousands of jobs since its state rescue four years ago.

It has also offloaded a chunk of its business banking operations and is in the process of floating its Direct Line Group insurance arm.

The 2.5bn minimum fee to which RBS committed when it joined the APS has now expired, and the bank is now paying a daily fee for its continued presence in the scheme.

Stephen Hester, RBS's chief executive, has argued publicly for the bank to be allowed to withdraw. The FSA has to authorise the exit because of the implications it has for the bank's capital structure.

I also understand that there is continued disagreement between the bank and the Government over the value of something called a dividend access share (DAS), which gives the Treasury special rights over its shareholding in the bank.

The DAS has to be cancelled before RBS can resume paying dividends to ordinary shareholders without such payments taking place on punitive terms. The bank believes the DAS has a substantially lower value than ministers.