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RBS shows left must think for itself

rbsRoyal Bank of Scotland (RBS) is a publicly-owned bank. The overwhelming majority of its shares are in state hands, 73% of the equity. Yet it was the only major bank to fail outright the recent ‘stress test’ of its balance sheet conducted by the Bank of England. The bank is a basket-case. It is costing all of us money, and yet it could be a key contributor to economic recovery.

For many years the left has called for the nationalisation of the banks. This happened as a result of the financial crisis. But with very few exceptions the left had very little to say about what the public sector could do with its newly-acquired and deeply damaged assets. That was an error. Now that the left leads the Labour party and could be in position to lead the next government, it should use every lever at its disposal to produce an investment-led recovery. RBS should be seen as one of those levers.

Financial snapshot

The financial position of RBS is deteriorating, highlighted by the Bank’s stress tests. The stress tests themselves have four fundamental elements, related to the earlier global financial crisis. In the Bank’s stress scenario, world GDP falls by the same amount as in the global financial crisis and UK GDP falls by a lesser amount. But UK unemployment rises more than previously and UK property prices fall by a significantly greater amount. The stress test assumptions compared to the global crisis are shown in Chart 1 below.

Chart 1. Stress test scenarios compared to 2007/08

Source: Bank of England
The specific problem for RBS is revealed by this fundamental test. RBS is a loss-making bank, incurring a pre-tax loss of £2.7 billion in 2015. But it is also particularly unprepared to withstand a downturn in the housing market. This is despite the fact its so-called capital cushion against losses has increased. In 2010 its Tier 1 capital ratio was 10.7% while in 2015 it had risen to 15.5%. This is a startling outcome, which completely belies the idea that banks can be insulated against shocks simply by increasing their spare or cushion Tier 1 capital. These are economic shocks outlined by the Bank of England, with perhaps severe financial consequences. The answer lies in economic policy, and its financial implementation.
RBS has become a more risky bank since the crisis, not a less risky one under its private sector management even while it has been in public ownership and its Tier 1 capital ratio has risen. This is because it has increased its dependence on lending to the housing market. Between 2010 and 2015 RBS increased mortgage loans on its balance sheet from £90.6 billion to £104.8 billion, and the proportion of its total balance sheet from 83.6% to 86.4% of the total.
This completely lop-sided dependence on mortgages means that any projected decline in house prices has an even greater damaging effect on RBS’s balance sheet than previously. RBS has in effect been cutting its lending to the productive sectors of the economy from already abysmally low levels. Business loans now account for just 4.4% of the total RBS balance sheet.
Of course, if private sector businesses are unwilling or unable to borrow for productive investment then it would be foolish for RBS or any bank to chase business by offering uncommercial business lending. But thankfully, even in the UK, there are large parts of the economy which are in public sector hands and which could easily increase their productive borrowing for investment.
These include local authorities and universities. There is too still a host of companies in public sector hands. Local authorities own, or have significant holdings in a series transport networks, bus services, rail networks and even airports. In addition, they could all usefully increase and upgrade local authority housing. Universities own research facilities and share in science parks which can be expanded. They own publishing enterprises, which could be upgraded and digitised. Large scale companies remain in public hands, from broadcasting companies, to research facilities, the NHS, the Post Office, water companies, network rail and air traffic control.
All of these could be expanded with investment and in the process would increase the level of productivity and prosperity for the economy as a whole. The publicly-owned National Grid could undertake its own large scale investment in renewable energy projects. The return on them would be on average very high, and RBS itself would be rebalanced away from the housing market.

The Tory government has presided over the longest fall in living standards in the UK on record. It has produced the Brexit car crash simply in order to manage its own internal divisions. It is utterly incapable of lifting the economy out of its morass. Inevitably, it has no idea how to lead RBS out of its crisis. The only reason a fire sale has not been conducted is that outstanding legal cases, primarily in the US, mean that some parts of RBS are still burning.

Labour cannot take its lead from the Tories on any of these issues. One of the most difficult tasks in politics is to arrive at an objective perspective on key issues, overcoming the weight of prejudice fostered by the enemies of workers and the poor. But RBS is a practical example of how the left must learn to think for itself, and use every lever at its disposal to deliver an investment-led recovery.

This post first appeared on Socialist Economic Bulletin.


  1. John Penney says:

    What a strange, dishonest, article from Tom. On the one hand he appears to be, quite correctly , arguing that a Labour government which really wants to tackle the UK’s deeply rooted , structural ,as well as mistaken austerity policy-led, economic crisis , needs to adopt interventionist state-led “Left Keynsian” expansionist economic policies.

    These “Left Keynsian” policies would bring nationalised parts of the financial sector like RBS, and local authority owned companies, within an overall state-led economic plan , which “Roosevelt New Deal style” would try to compensate for the now long term private sector “investment strike” , to get the economy moving again far beyond the financial sector .

    From this we might assume Tom has finally seen the wisdom of Labour adopting a 21st Century version of the expansionist Bennite Alternative Economic Strategy of the 1980’s. But , confusingly, Tom remains a vituperative opponent of the UK leaving the EU and/or the Single Market ! A EU and Single Market nowadays entirely focussed on enforcing entirely neoliberal, privatised, “Uberised”, market conditions across the member states, precluding any EU nation state’s government from pursuing the state-led, comprehensive economic planning and direction, that Tom’s article appears to be advocating !

    Is this the faux social democratic “Wilsonian” retro politics that the Labour Right are now going to pump out to conceal their actual continuing total commitment to the neoliberal status quo, to take on “Corbynism” ? I think so. It’s an enhanced version of the entirely bogus “I’m a Bevanite Socialist” narrative spewed out by Owen Smith during the 2016 Leadership Election – a cynical attempt to claim that the Labour Party can return to the (quite strategically correct) path of interventionist state-led Left Keynsian economic strategy, but without the nasty Lefties around Corbyn, or even leaving the neoliberal Single Market.

    Some , even regular contributors here, will be fooled into thinking that this reflects the “victory of Left Keynsianism” across the Labour Party. Think again – it does indeed reflect the ideological collapse of the openly stated ,Austerity-supporting, privatisation-facilitating, neoliberalism of the Labour Right. It does not reflect a genuine shift , by either the Right of the PLP , Austerity implementing Labour Councils across the UK, or their Big Business backers, from actually continuing to pursue a neoliberal agenda. Only the genuine Left in the Labour Party can implement that, and only if the UK leaves both the neoliberal EU enforcement machine AND the equally neoliberal Single Market/Customs Union .

  2. C MacMackin says:

    While I agree with much of what John Penny writes, I’m not sure if this article is necessarily dishonest. It may simply represent the very low level of political thought seen in much of what is supposed to be the Labour Left today.

    That said, taking this article on its own and leaving aside those previously written by Tom O’Leary, it is broadly correct. I’m not entirely sure what the point of all those statistics about RBS was though. It’s also unclear to me that the state owning “73% of the equity” of RBS is the same as owning 73% of the shares. Finally, while it is worth noting the portions of the economy still in state hands and what could be done with them, the National Grid is not in fact one of them. In any case, surely we should also be more ambitious than simply limiting investment to the dregs of the economy left in the public sector and make it a policy to expand public ownership? I’m not even proposing a Bennite nationalisation plan here–simply a return to Wilsonian levels of public ownership.

    1. John Penney says:

      In 2009 , the government converted the preference shares in RBS that it had acquired in October 2008 to ordinary shares. This removed the 12% coupon payment (£600m p.a) on the shares but increased the state’s holding in the bank from 58% to 70%. So the UK Government can essentially do whatever it wants with this dead albatross of a bank.

      I think we do have to take into account the wealth of previous, utterly uncritical, pro EU, articles by Tom O Leary, when we try to decode this , at surface level, pro Left Keynsian, state interventionist , article, C. Mac. Given that very clear background, this article can only be described as dishonest , and “dodgy agenda-laden”.

      Like you, I also noted with incredulity that the rag bag “dregs” of leftover ,still state/local government, owned productive resources cited by O Leary have been given such a key role in driving a Left Keynsian expansionary economic strategy ! No renationalisation of key utilities and industries, or recommendations for a more interventionist, directive planning, role for government, even at a 1960’s Wilsonian level in Tom’s proposal.

      The explanation is clear – Tom wishes to try and seize back the initiative for the pro EU Labour Right from the mild “Left Keynsian” of “Corbynism” , by offering some vague, extremely limited ,RBS and local authority companies, “interventionism”” in the neoliberal economy. Such a minimalist “intervention” , would achieve nothing , given the scale of the UK structural economic crisis. and who actually believes a Labour Party controlled by the Right again would even do that ?

      1. C MacMackin says:

        Thanks for the clarification on RBS shares. I was just uncertain on the meaning of Tom O’Leary’s phrasing and, as he has a history or making misleading statements, wondered if its meaning was different from the obvious.

        I didn’t mean to completely dismiss Tom O’Leary’s previous pieces of writing. I was rather indicating that my latter paragraph was meant to focus on this particular article. Looking back, I recall that he had explicitly precluded nationalisation of anything other than than train operating companies (as their franchises ended) due to cost. This, presumably, is the reason why he limited his economic interventions listed here to such a small list.

        I prefer to avoid speculating about someone’s motives when debating. In particular, we should remember Hanlon’s Razor: “never attribute to malice that which is adequately explained by stupidity.” In any case, I would rather convince people that my opponent is wrong than that he is malicious.

    2. C MacMackin says:

      Incidentally, other parts of that list besides the national grid are also inaccurate. Only one water company (Scottish Water) is publicly owned, although Glas Cymru has a strange, quasi-nonprofit structure. Air traffic control is only 49% owned by the state and has been privatised completely at some airports. 42% is owned by BA, 5% by staff, and 4% by Heathrow. As such, there is no guarantee that the government could control it, although there is a golden share which might give some extra power. The broadcasting companies referred to are presumably the BBC and Channel 4. Both are, for good reason, held at arms length from the government. As far as I know, neither has a pressing need for investment anyway. Only a few cities still own their transit services, although it is certainly worth investing in those which do. Universities are independent bodies, public only in the sense that they get public funding. While many would likely be willing to invest, they would probably want assurances of continued funding in order to be able to operate their new assets, particularly research assets.

  3. Rob Green says:

    There is only one serious socialist policy towards the banks and that is that they be allowed to go bankrupt and their estates, staff and deposits be taken into state administration to be used to form a unified National People’s Bank with a monopoly of credit to prevent private financiers from ever ripping us off again. The super rich and corporate creditors of the banks who bought their Ponzi Bonds by the trillion must take the hit. Austerity for the rich not the poor. This new bank to lend to small business at base rate and to facilitate social investment in accordance with a democratic and sustainable plan. Everything else is just opportunist pap.

  4. r says:

    RBS did not fail the Bank of England stress tests because of its mortgage book. Look at Lloyds Banking Group’s performance, they’re even more heavily geared towards mortgage lending.

    The biggest factor behind the failure was the BOE’s assessment of the impact from a huge fine looming in the US over the sale of mortgage-backed securities pre-crisis.

    But you are right that more could be done for business lending. Banks pile into mortgages because they’re a safe bet, require low amounts of capital set against them and are pretty profitable. Capital rules could be tweaked to allow more business lending – but it is without a doubt a riskier bet to back a start-up company, or even a major infrastructure project, than it is to lend against property (when you take the property as collateral if the borrower can’t repay). So it’s always a balance between how risky our banks are and how much money is lent to the economy.

  5. Peter Rowlands says:

    Quite unacceptable criticism by John P, firstly by effectively saying that anyone who favours staying within the single market ( as I do) is a neoliberal colluder, and secondly by dismissing quite sensible proposals as to how some public investment might be channeled as a right wing plot! This from the person who has quite rightly criticised the lack of detail in the Corbyn/McDonnell economic plans. You can’t have it both ways.
    On renationalisation, Cmac, (except the railways which won’t cost much), for financial reasons I think this must be a medium term goal, although greater control can be effected immediately.

    1. C MacMackin says:

      I don’t buy this line of argument, at least with regards to the recently privatised companies. Take the Royal Mail. The argument that we can’t afford to renationalise it now is equivalent to the argument that we couldn’t afford not to privatise it a few years ago. And yet everyone on the Left was dead-set against privatising it. If we could afford not to get the money from selling it then, we can afford to spend that money buying it back now. Furthermore, Attlee’s nationalisations (which were accompanied by very generous compensation) took place at a time when there was far higher public debt than today.

      1. Peter Rowlands says:

        On recent nationalisations, while there is a logic in what you say,in practice the money has been spent, and it would therefore be an extra cost.
        The Attlee nationalisations is a more serious point.Despite high levels of wartime debt there was however strong support for it, and for the austerity and high taxation that made it possible, although the Marshall Plan helped.Some of the industries were so run down or underdeveloped that a Tory government would probably have had to nationalise them. ( Coal, energy,rail).
        The cost of nationalising energy has been recently estimated at £180bn. That’s about a third of JMD’s £500 bn already. Better to impose stringent controls, so that share prices are forced down and we can eventually renationalise quite cheaply!

        1. Danny Nicol says:

          You don’t pay out money for nationalisations. You give non-redeemable bonds. The government has to pay out interest on the bonds, but on the other hand it gets the profits from the companies. There is therefore no reason to postpone the extension of public ownership, which is absolutely essential to a socialist economic programme.

        2. C MacMackin says:

          I don’t deny that nationalisation would be an extra cost. I am simply saying that if we were willing to put up with the extra debt which would have accumulated by not privatising these assets, then we should be willing to put up with the extra debt incurred by renationalising them.

          I read that this energy cost required a few flawed assumptions, the biggest of which is that the government would simply buy these companies as they exist now. This would mean buying various non-British assets (for example, National Grid plc owns transmission infrastructure in New England) which greatly adds to the price. If the distribution companies were not bought out but instead replaced by a publicly owned one (or municipal ones) then this would yield further savings. We could also leave small renewable energy producers as they are.* These measures led to another estimate of only £25bn, assuming that full compensation would even be paid ( This value is expected to fall by the time of the next election, as share prices in energy companies have not been doing well. This may well be optimistic, but the £180bn is surely pessimistic. I would also suggest that any power plants which need to be shut down soon (i.e. much of the fossil fuel sector) can be left in the private sector, with the public transmission or distribution company exercising a monopsony on purchase. These should quickly (ideally within 10 years) be replaced with new clean energy supplies built in the public sector. Existing nuclear and renewable infrastructure, on the other hand, should all be taken into public ownership immediately. (I realise much of this would violate EU liberalisation directives, which is why I have been so insistent that Labour should try to get out of them as the UK negotiates its relationship with the EU.)

          By all means, use public policy to drive down the cost of nationalisation. However, there are two problems with relying extensively on this with nationalisation being only a medium-term goal. First, it risks losing sight of nationalisation as the end goal. No government can say that they are simply enacting regulations to force down share prices, so I fear that regulation would become an end in itself. One of the great tragedies of Swedish social democracy was that their lack of traditional emphasis on nationalisation led to the mistaken belief that it didn’t matter who owned things. As a result, since the late 70’s, the lack of direct control over the economy has required scaling back of the welfare state while the belief that ownership doesn’t matter has led to disastrous outsourcing policies. Second, any regulations likely to be effective at driving down share prices would provoke such fierce opposition from capital, that nationalisation would likely be necessary in short order to overcome it. We can see some historical parallel for this in Sweden’s experiment with the Meidner Plan.

          Finally, you are forgetting the fact that there are immediate benefits to nationalisation. It is not as though this money is simply being burnt. If the priority is paying off the cost as soon as possible, then what currently takes the form of shareholder dividends can be used to do that–possibly within only 10 years in the case of energy. Alternatively, if the focus were instead on lowering prices, then this would give consumers more disposable income and help stimulate the economy, increasing the tax base. Most likely, some combination of these approaches would be used.

          * I happen to disagree with such a position, but I mention it because it was one of the assumptions used in the £25bn figure. I doubt that these assets would add up to very much, though, in comparison with the rest of the energy sector.

          1. Danny Nicol says:

            Nationalisation need not actually cost the government anything, even if full compensation is paid.

            To reiterate: when the government pays compensation for a business it takes over, it does so in the form of bonds; the government then pays out interest on those bonds annually, but it also gets the profits which the company makes.

            Money is therefore not the real problem. But since Labour’s neoliberal wing’s absolute priority is the maintenance of capitalism, they have (along with the Tories) spent decades peddling the myth of “expensive nationalisation” in order to achieve their number one objective of permanent private sector domination of the British economy.

          2. C MacMackin says:

            I do understand that’s how nationalisation works. However, I don’t think it is accurate to say that it doesn’t cost anything. Those bond-swap policies are equivalent to the government borrowing money with a long-term loan to pay for the nationalisation outright. The point about profits of the nationalised industry being used to service this debt is, of course, fair and you’ll see that I made it myself.

          3. Peter Rowlands says:

            CMac. Thanks for your very well argued and quite persuasive piece, which almost convinced me, but I am still inclined, given the major investment we would otherwise be committed to, to defer nationalisation ( except for the railways) until at least a second term, partly to contain expenditure ( and even if it pays for itself it will still be seen as extra expenditur ), partly to limit our commitments which will be very considerable anyway.

    2. John Penney says:

      I think you are a tad oversensitive, Peter. I recognise that you are on the
      , Left Keynsian, Reformist Left, and we simply disagree tactically I think about the wisdom of the UK leaving the EU under a viciously Right Wing Tory government. But , like me, I think you accept that the EU’s overall current purpose is to enforce the structures, principles and values of laisse faire neoliberal capitalism on all the member states ? And to force these principles on them, if, like Greece, a state resists the neoliberal/Austerity agenda ?

      I’m contrast, I have never read anything in the articles by Tom O Leary on the EU, and the calamity he constantly predicts that will arise from leaving this capitalist neoliberal enforcement machine that is the EU/Single Market , that indicates that he has anything but an unconditional Labour Right sympathy for the EU , and all its purposes.

      That being the case , I view his very half-hearted suggestions here for an extraordinarily limited in scope “poor man’s Keynsianism”, based on a smattering of remaining public sector assets and RBS, with the same respect as most of us viewed Owen Smith’s entirely bogus conversion to “Bevanite socialism” earlier in the year ! O Leary is quite blatantly attempting here to “steal the Labour Left’s economic expansionist Left Keynsian clothes”, with his shallow , and actually utterly inadequate, proposals, Peter. Not to be taken seriously.

  6. David Pavett says:

    RBS is not “publicly-owned”. The government holds the majority of the shares but that is not the same thing.

    Air Traffic Control is not “in public hands” either. The government holds 49% of the shares (+ a “golden share”).

    But with very few exceptions the left had very little to say about what the public sector could do with its newly-acquired and deeply damaged assets.

    Maybe, but even so work has been done on the question ( this for example ) so it would have been useful to take that into account rathervthan appearing as a voice in the wildernest.

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