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The Defenestration of Stephen Hester: What Now for the RBS?

The announcement on 12th June that Stephen Hester was to step down as chief executive of the Royal Bank of Scotland Group (RBS) at the end of this year has prompted much speculation. Did Mr Hester fall or was he pushed? If pushed, who was responsible? If by the Chancellor, George Osborne, what was the aim and will Mr Osborne be more or less likely to achieve his aim as a result? Finally, what now for the RBS group?

Stephen Hester, who admits to mixed feelings about such a stressful and politically exposed position, was expecting to carry on for some time to come: ergo, he was pushed. The Chancellor appears to have put pressure on the other RBS directors and it seems primarily to have been his decision that Mr Hester should be replaced. The main motive appears to have been a desire to include a positive message in next week’s Mansion House Speech, probably with an eye on the 2015 general election. Mr Hester may also have seemed something of an ‘over-mighty subject’ with a vision for the RBS – superior in business terms but less appealing from a party political viewpoint. In particular, Mr Hester seems to have wanted to maintain a greater presence for the securities arm – which people forget has often cross subsidised the retail banking side in the RBS and other banking groups in the past – and may also have been less keen to lend money imprudently in order to boost the economy before the rapidly looming election date.

The Chancellor and Mr Hester may also differ on whether to split the RBS group into a ‘bad bank’ that would stay on the government’s books for the foreseeable future and a ‘good’ bank that could be brought to market more rapidly, probably with an announcement before the 2015 election, even if the logistics might preclude an imminent privatisation. Certainly, if one of Mr Osborne’s aims was to accelerate privatisation, the treatment of Mr Hester may have backfired, followed as it was by a sharp fall in the RBS share price after the announcement. Nor is it clear why the small number of business executives capable of bringing RBS to market would want to take on such a highly politicised bed of nails.

However, for the future, the evidence is that even a monolithic ‘good’ bank would be too large on normal competition grounds and that the RBS should be brought to market as a series of small retail banks instead (see Crisis Management? How British Banks Should Face the Future, Politeia, 2009). Indeed such a step should make sense, especially to the Scottish National Party – the dog that hasn’t yet barked; curious especially since SNP leader, Alex Salmond, was once at the RBS as an energy economist. For the SNP the case for the splitting of and a separate flotation of NatWest from the rest of the group should be especially compelling.

In an independent Scotland, the RBS would have such a dominant market position that it would probably be nationalised, given that the SNP are unlikely to favour the liberal-market solution of a break up. With the National Westminster bank included, the RBS group would be an uncontrollable behemoth in Scottish terms. (Indeed, in the early 1970s , when I was at the RBS – well before the takeover of NatWest – the ‘Royal’ had around 45 per cent of the Scottish banking market, followed by the Bank of Scotland (which subsequently dragged down HBOS), with a significantly smaller market share held by Clydesdale.) In practice, it probably makes sense to go further and split the NatWest itself into such historic components as the District Bank, National Provincial and Westminster. This would help inject real competition into the retail banking market. The parallel here is with the Thatcher privatisations of the 1980s. By and large, the successful privatisations, such as Nicholas Ridley’s de-socialisation of the coach industry, put competition first and created a significant number of competing players. Less successful privatisations tended simply to substitute public sector monopoly profits for private sector ones, with some improvement in efficiency and innovation but nothing like as much as there should have been.

Stephen Hester may be leaving RBS: but the problems with which the Chancellor must grapple are of a different order. Large banks, be they public or private, avoid the discipline of competition. When it comes to the RBS, even a monolithic ‘good’ bank would be too large on normal competition grounds. RBS should therefore be brought to market as a series of small retail banks.

*David B Smith is Visiting Professor, Derby Business School, the Chairman of the IEA’s Shadow Monetary Policy Committee and author of Politeia’s Crisis Management: How British banks should face the future.

David B. Smith

David B. Smith is a City economist who worked as a macroeconomic modeller and economic forecaster, predominantly in banks (including the Bank of England) and security houses (1968-2006). He maintains his own macroeconomic forecasting model at Beacon Economic Forecasting. His Politeia publications include Britain's Taxable Capacity: Has it Reached the Upper Limit? (2020), The Brexit Settlement and UK Taxes (2018) and Banking on Recovery: Towards an accountable, stable financial sector (as co-author, 2016).

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