Royal Bank of Scotland set to report up to £8bn losses for 2013

Unscheduled trading statement to reveal bank, 81% owned by taxpayer, hit by extra £2.9bn over conduct and mis-selling issues

Royal Bank of Scotland is facing a row over its pay policies after a fresh hit for legal bills and mis-selling scandals put the bailed-out bank on track to report up to £8bn in losses for 2013.

Even though its nine-strong top management team said they would waive any bonuses, given the scale of the losses, the bank gave the strongest indication yet it would sidestep the EU bonus cap by asking shareholders' permission to pay bonuses worth 200% of salaries – double the size of the restriction imposed by Brussels.

Chairman Sir Philip Hampton insisted RBS had to keep paying competitively. He spoke at a hastily convened conference call caused byan unscheduled trading statement in which the 81% taxpayer-owned bank revealed it would incur an extra £3bn of losses for conduct-related matters over the US sub-prime mortgage crisis and mis-selling o fpayment protection insurance and interest rate swaps.

The additional costs come on top of £4.5bn losses from the creation of a mini-bad bank inside RBS and, according to estimates, could drive the bank to losses of around £8bn by the time it reports full-year results at the end of next month.

If the loss is on that scale it would mean RBS has incurred more than £40bn of losses since its 2008 bailout – almost as much as the £45bn taxpayers pumped in to rescue it.

The move appears to push back any prospect of chancellor George Osborne selling off any of the taxpayers' stake, even as he prepares to press ahead with the sale of Lloyds Banking Group as soon as next month.

The extra £3bn includes £1.9bn for various claims and past conduct issues facing the bank – most likely the potential cost of a settlement over sub-prime mortgages in the US – plus £465m for PPI mis-selling, another £500m for interest rate swap mis-selling, and another unspecified £200m. The latest costs bring the total PPI bill to £3.1bn and swaps mis-selling to £1.3bn.

Ross McEwan, who took over as RBS chief executive on 1 October from Stephen Hester, had already said he would not take a bonus for 2013 and now the rest of his eight-strong executive committee will also forgo their multimillion-pound payments.

The New Zealander, promoted from running the retail bank after Hester's sudden departure, said the scale of the costs incurred from past mistakes had not been expected at the time of the bailout.

"This is about leadership. I know this team is not responsible for the past mistakes but we are the leaders running the company now and have to show we take accountability seriously," he said, in reference to the move to block bonuses for the top management team.

But the bank may face hurdles in its plans – still being finalised – over pay in light of the EU bonus cap that comes into effect for bonuses paid this time next year. The cap restricts bonuses for the most senior staff to 100% of salary, but can be lifted to 200% of salary if shareholders approve.

Hampton said: "We obviously need to be sensitive to our shareholding structure and the political and media issues around that, but the ability to pay competitively we think is fundamental to the prospect of getting to where we need to be."

Labour has already called on Osborne to use the state shareholding to stop such a request if it is made and UK Financial Investments, which looks after the taxpayer stake, is thought to be considering abstaining if it is put to the annual meeting in May.

Lord Oakeshott, the Liberal Democrats' former Treasury spokesman in the Lords, called any such bonus proposals "preposterous" and called on the government to nationalise the Edinburgh-based bank.

"Taxpayers are having to sign a never ending stream of blank cheques to cover disastrous long-term management at RBS while the bank's still failing to lend," Oakeshott said.

Andrew Tyrie, chairman of the Treasury select committee, stressed the need for the bank to lend to small business customers. "RBS is still paying a heavy price for past misconduct. So too are its customers and taxpayers. It is crucial for the recovery that lending, particularly to SMEs, is not constrained as a result," Tyrie said.

Payments of as much as £5.6m promised to Hester will not be affected.

McEwan said the losses related to a period at the time of its bailout when RBS was the biggest bank in the world. "The scale of the bad decisions during that period means that some problems are still just emerging. The good news is we are now a much stronger bank and can manage these costs while still supporting our customers," he said.

The unexpected statement came at 4pm following a board meeting and 30 minutes before the market closed, leaving the shares closed 2% lower at 332p – representing a £15bn loss on the taxpayers' stake.

Nathan Bostock, who has quit as finance director to join Santander, said there would be a "substantial loss" but would not be precise.

The announcement was made to coincide with a deadline by US regulators to file the results of one of its US arms.

Standard & Poor's said the bank's credit rating was unaffected but the key capital ratio will be among the lowest of its peers.

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FCA launches review into RBS's small business lending

Britain's financial regulator has appointed two outside firms to review part-nationalised Royal Bank of Scotland's treatment of struggling small business customers.

RBS, which is 82-percent owned by the government, has been accused by government adviser Lawrence Tomlinson of pushing struggling small firms into its Global Restructuring Group (GRG) "turnaround" unit, so it could charge higher fees and interest, and take control of their assets.

The Financial Conduct Authority (FCA) said on Friday that consultancy Promontory Financial Group and Mazars, an accounting firm, will conduct the independent review which will be paid for by the bank.

The review will consider allegations of poor practice set out in two reports, and publish its findings in the third quarter.

"The review will also consider whether any poor practices identified are widespread and systematic. If this is the case, the second stage of the review will identify the root cause of these issues and make recommendations to address any shortcomings identified," the FCA said in a statement.

Jon Pain, head of conduct and regulatory affairs at RBS, said that in addition to the FCA's review the bank has commissioned lawfirm Clifford Chance to further investigate loans to business customers.

"Any customer with concerns about their experience with GRG can contact Clifford Chance to have their case examined," Pain said.

The FCA said that while commercial lending is not a regulated activity, if the findings reveal issues which come within the FCA's remit it will consider further regulatory measures.

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Banking reform bill could be approved before Christmas

Bill designed to prevent further banking scandals and misconduct enters Lords for what could be the last time

Andrew Tyrie's work is nearly done. The Conservative politician, who has been a key figure in attempts to clean up the banking system, stood up in the Commons last week to remind fellow MPs of the tasks that had been set for the parliamentary commission on banking standards, which he had chaired.

The first was to report on professional standards in the banking industry in the wake of the Libor rigging crisis, and the second was to outline the lessons that could be learned for the government, while making recommendations for legislative change.

Much of that work may be concluded this week, with the 200-page banking reform bill entering the Lords on Monday for what could be the last time. With just one amendment to the bill still proving contentious, there is an expectation the work will be completed before the Christmas recess.

The legislation includes a package of measures intended to force senior bankers to take responsibility when things go wrong, allowing bankers to be charged with reckless misconduct if their institutions go bust, and forcing them to erect an "electrified" ringfence between their high-street and investment banking operations.

Last week's debate in the Commons coincided with a timely reminder of the scandals that had first set Tyrie and his fellow commissioners – made up of lords and MPs including the former chancellor Lord Lawson and the Archbishop of Canterbury, Justin Welby – upon their task. Lloyds Banking Group was fined a record £28m for a bonus culture that saw staff mis-sell financial products, while Royal Bank of Scotland, which was also bailed out, was fined £60m for breaching US sanctions rules.

"The banks have discovered that the scale of the damage done by the revelations and the scale of the fines that are now being imposed are systemic in implication for their institutions and that has shaken them up a lot," Tyrie told MPs last week. "But I do think the culture at the top of our banks is changing. The task of our legislation is to entrench that change for a generation. We have had this crisis. The horse has bolted. What we have got to do now is devise a stable door that can keep the next horse in."

Stuart McWilliam, a campaigner for Global Witness, said changes to the rules facing top bankers were a sea change because the City regulator, the Financial Conduct Authority, would be better able to hold banks to account. "It gives the FCA the power to hold the most senior bankers personally responsible for failures at their banks – a pretty good incentive for changing bankers' behaviour for the better," he said.

Alan Bainbridge, a lawyer at Norton Rose Fulbright,described the changes to how top bankers are authorised to work in the City as groundbreaking.

The existing approved persons regime will be changed with a new system aimed at top bankers taking responsibility for their actions and a new licensing regime. There is scepticism about whether an offence of reckless misconduct, under which bankers can be tried if their institutions collapse, can be used in practice.

But Conservative MP Mark Garnier, who sits on the Treasury select committee and was on the parliamentary commission on banking standards, likened it to a "nuclear deterrent" in the Commons last week.

One of the most crucial measures is the "electrification" of the ringfence between high street and investment banks. Bainbridge said this was "tantamount" to the Glass-Steagall rules imposed after the Great Depression in the US in the 1930s and only dismantled 15 years ago.

Lord Sharkey, the Liberal Democrat peer whose amendment on capping payday loan rates forced the government to act to restrict high rates of interest, said the electrification was the "key action" from the legislation.

"Parliament will need to keep an eye on how this really works. Will Chinese walls really be sufficient? Will the culture of investment banks continue to dominate the management thinking of retail banks held in the same groups," said Sharkey.

The Policy Exchange thinktank is warning of rising costs to customers from the ringfence, which does not need to be erected until 2019. Omar Ali, UK head of banking and capital markets at accountancy group EY, said the legislation meant that the "fabric of banking is changing" and the UK will have the most stringent set of rules anywhere in the world. Banks could end up becoming too risk averse, which could result in restricted lending to the real economy, he warned.

Even as royal assent comes closer, questions are still being asked about whether legislation can change the culture of banking. Garnier told MPs last week that a new industry body monitoring banking standards and the emphasis on top bankers taking responsibility was significant.

"An organisation such as HSBC has 270,000 people working for it, so no matter how sincere the integrity of the individual at the top, we must work out a mechanism to drive integrity throughout the system. Personal accountability for the senior management of the banks is crucial in that.

"I keep coming back to this point: if [HSBC's chairman] Douglas Flint is waking up at 3 o'clock in the morning worrying that somebody in Kidderminster is getting something wrong, that is a good thing."

Sharkey is among those who think that increased competition on the high street is also needed. The big four – Lloyds, RBS, Barclays and HSBC – control over 75% of the market.

"The banking reform bill addresses the regulatory issues, as it should. Banking culture is less easy to fix. There are some who believe that there is still no real competition in our banking system," Sharkey said. "What [will] keep them honest is competition for customers."

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Banks braced for huge EU fines over Libor rate-rigging scandal

UK's RBS believed to be among at least six banks facing record fines for manipulating European and Asian interest rates

The interest rate-rigging scandal that has damaged the reputation of the banking sector looks likely to be reignited as Brussels is expected to impose multimillion-pound fines on a number of major firms for manipulating crucial benchmarks.

The action by Joaquín Almunia, the EU competition commissioner, will pile further pressure on Royal Bank of Scotland, the bailed-out bank already dealing with the fallout from a major systems meltdownthat left millions of customers without access to cash and allegations – which it denies – of mistreating its small business customers.

The 81% taxpayer-owned bank is reported to be among at least six major players in the financial markets, including Deutsche Bank in Germany and Citigroup in the US, caught up in the cartel investigation. The EU is said to be ready to impose record-breaking fines for alleged collusion for rigging key benchmark rates.

Brussels is thought to have focused on yen Libor, based on Japanese interest rates and priced out of London; Euribor, the Brussels equivalent to Libor; and the Tokyo rate known as Tibor. Almunia has been in discussions with banks for weeks and the resulting penalty is expected to surpass the record €1.5bn (£1.24bn) imposed on a cartel.

Each cartel could face combined fines of as much as €800m, although it was unclear on Tuesday nightwhat the exact penalties would be and how the sums would be divided. Penaltiesfor breaches of antitrust rules can theoretically be as much as 10% of turnover.

The fines are the latest to be levied on banks and financial firms for manipulating key benchmark rates. Five firms have already been fined by market regulators on both sides of Atlantic in an ongoing investigation into the manpulation of the rates, used to set interest rates on loans granted around the world.

Barclays was fined £290m in June 2012 in a move that led to the resignation of its chairman, Sir Marcus Agius, chief executive, Bob Diamond, and other senior managers. Other banks who have since been fined by US or UK regulators RBS, UBS of Switzerland and the Dutch bank Rabobank. The money broker Icap has also been fined and the FCA's investigations are ongoing.

The Libor investigation has sparked interest in a number of other benchmarks used to price financial products, particularly the foreign exchange markets, which are now being investigated by a number of regulators around the world, including the UK's Financial Conduct Authority.

Reuters reported that UBS had alerted the European Commission to the yen interest rate manipulation and would not be penalised. The Financial Times said Barclays would avoid a fine for Euribor rigging for similar reasons.

Between six and ten banks are reported to befacing fines, including Citigroup, which would be the first US bank to become embroiled in such high-profile penalties for manipulation of key rates.

Deutsche Bank and RBS will be penalised for rigging the benchmark eurozone interest rates known as Euribor. French bank Société Générale is also part of the group facing sanctions for alleged Euribor rigging, according to Reuters.

The news agency said HSBC and the French bank Crédit Agricole had not reached a settlement, while the FT said the US bank JPMorgan had also failed to do. They may face fines later.

Reuters said Barclays, Deutsche Bank, Société Générale, RBS, JPMorgan and Citigroup declined to comment and HSBC and Crédit Agricole were not immediately available to comment.

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New RBS chief Ross McEwan denies 'systematic' profiteering

McEwan admits damaged reputation but says bailed-out bank did not wreck businesses to gain assets

Royal Bank of Scotland's new boss admitted on Wednesday night that the reputation of the bailed-out institution has been seriously damaged by allegations that it is deliberately wrecking small businesses in pursuit of profit.

But Ross McEwan, who started as chief executive last month, fought back against the claims made by Lawrence Tomlinson, an adviser to business secretary Vince Cable.

The allegations against the 81%-taxpayer owned bank, in a report published on Monday, have prompted the interest of City regulators and the Serious Fraud Office (SFO).

McEwan said the bank had not received any evidence of a systematic effort to make money from customers by pushing them into its turnaround division, known as the global restructuring group (GRG).

Pledging a full investigation by law firm Clifford Chance, McEwan said: "It is important to note that the most serious allegation that has been made is that RBS conducted a 'systematic' effort to profit on the back of our customers when they were in financial distress.

"We do not believe that this is the case, but it has nonetheless done serious damage to RBS's reputation. No evidence has been provided for that allegation to the bank."

Tomlinson makes allegations in his report – compiled from evidence he had received from businesses – that RBS was pushing businesses into its GRG division, which in turn was buying up properties through its specialist property arm West Register to make a profit.

Sir Philip Hampton, the chairman of RBS, called the allegations "unsubstantiated" and "anecdotal" in an interview with the BBC in which he said the bank had dealt with tens of thousands of customers in distress since the crisis. "If there are facts that show we have behaved in the wrong way then we will take appropriate action," said Hampton, who acknowledged the bank may have been "too heavy" in some instances.

RBS has not received the details of the individuals and businesses used by Tomlinson to compile his report, which Cable has already handed to City regulator the Financial Conduct Authority. The FCA is expected to conduct a detailed analysis of the allegations.

The SFO has not launched a formal investigation but said: "We are aware of the issue and monitoring developments."

The identities of individual customers are not contained in the Tomlinson report – in order to protect their relationship with RBS – but about 20 examples are thought to be attached to the report sent to regulators and the Department for Business.

In his report, Tomlinson, a Yorkshire-based entrepreneur who is also a customer of RBS, said he had "shocking examples of business owners being confronted with last minute demands for information and money" that have forced their businesses over the edge. Tomlinson also called on all banks to look at the way they handle businesses in distress and for the FCA and the government to consider if the current rules are robust enough to protect customers. Lloyds Banking Group is also named in the report but does not face the same criticism as RBS.

RBS was one of the biggest lenders before the 2008 banking crisis and at one stage was responsible for 50% of all property loans to small businesses. A report the bank commissioned into its own lending practices, also published on Monday, by former deputy Bank of England governor Sir Andrew Large, said it had contracted its lending after the crisis too quickly.

McEwan said: "RBS played a big role in the lending boom that led to the UK's economic crisis. After the crash, tens of thousands of our customers saw their asset values plummet and ended up in serious financial difficulty. This was an economic crisis for Britain, but it was also a very personal tragedy for many families and small businesses around the country."

Concerned that the allegations will undermine trust in the bank – already battered by a £390m Libor fine and a mounting bill to compensate small businesses missold interest rate swaps – McEwan insisted the Clifford Chance review would be independent. It would report back by 31 January after scrutinising the main findings of the Tomlinson report, interviewing bank staff and customers and reviewing samples of loans.

Clifford Chance would also advise RBS on whether the allegations appear to have substance and make recommendations about steps, if any, should be implemented as a result.

Article Source : http://www.guardian.co.uk
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RBS accused of pushing small businesses to the edge to boost profits

Dossier claims business assets were seized cheaply amid call to end turnaround arm's 'conflict of interests' 

City regulators have been handed a dossier of evidence compiled by an adviser to Vince Cable which claims that Royal Bank of Scotland was deliberately wrecking viable small businesses to make profits for the bailed out bank.

The business secretary – a long-time critic of the banking industry's lending practices – said some of the allegations were so serious that he had handed the report, compiled by businessman Lawrence Tomlinson, to the regulators and the bank. It has also been given to Sir Andrew Large, a former deputy governor of the Bank of England, whose report on lending failures by RBS will also be released on Monday.

Tomlinson, appointed by Cable as "entrepreneur in residence", has compiled evidence from hundreds of businesses which have approached him after ending up in the bank's global restructuring group (GRG), and subsequently had their properties sold to its specialist property arm, West Register.

"There are many devastating stories of how RBS has wrecked good businesses and the ruinous impact this has on the lives of the business owners," said Tomlinson.

His redacted report, which removes the names of the businesses, also calls for RBS and Lloyds Banking Group to be broken up into six banks with a 10% market share to foster competition on the high street.

The accusations centre on the reasons businesses are referred to the GRG arm, run by the veteran banker Derek Sach, and the process by which West Register ends up taking control of some of the properties.

RBS argues that most of the businesses that end up in GRG are successfully turned around. It has promised to review the allegations made by customers.

Tomlinson, who initially posted requests for ideas on lending on the professional networking site Linked-In, cited "shocking examples of business owners being confronted with last minute demands for information and money" that forced businesses into financial difficulty. One business said dealing with GRG had cost them £256,000 while another claims it had to hand over £40,000 immediately to carry on borrowing from the bank.

These claims have yet to be confirmed. Businesses found themselves referred to GRG because the bank considered the value of their property had fallen or because of technical breaches of loan terms, such as late filing of information.

"The profit-making nature of GRG significantly undermines its position as a turnaround division, in which good businesses should be restructured and returned to normal banking. The temptation to get hold of assets and take additional profit from these businesses to boost GRG's balance sheet is clear," said Tomlinson, a Leed-based entrepreneur.

"From the cases I have heard, it is clear that a perception has arisen that the intention is to purposefully distress businesses to put them in GRG and subsequently take their assets for the West Register at a discounted price. This needs to be addressed and the conflict of interest removed," he said.

Cable, who did not commission the report, said: "Some of these allegations are very serious and I am waiting for an urgent response as to what actions have been taken. I am however confident that the new management of RBS is aware of this history and is determined to turn RBS into a bank that will support the growth of small and medium sized businesses."

Stephen Hester, who ran the bank for almost five years after its £45bn bailout, left in October and was replaced by New Zealander Ross McEwan. The bank said on Sunday: "In the boom years leading up to the financial crisis, the over-heated property development market became a major threat to the UK economy RBS did more than its fair share to fuel this and commercial property lending was one of the key drivers of our near collapse as valuations rapidly plummeted."

Article Source : http://www.guardian.co.uk
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Royal Bank of Scotland faces further fines over sub-prime mortgage crisis

UK Financial Investments outgoing chairman says RBS has been forced to hold more capital because of potential penalties

Royal Bank of Scotland is still facing potentially painful penalties from the US authorities over the sub-prime mortgage crisis, the Treasury select committee of MPs was warned on Tuesday.

Already hit by a £390m fine for rigging Libor and in discussions with regulators over an investigation into potential currency rigging, the bank has been forced to hold more capital by the Bank of England because of the possibility of further fines, MPs were told by Robin Budenberg, the outgoing chairman of UK Financial Investments (UKFI).

Budenberg, who was challenged about the influence the Treasury has over the body which was set up look after the stakes in the bailed out banks, said mortgage trading was one of the outstanding issues RBS faces. He made reference to JP Morgan, which has paid £8bn to settle a number of regulators' claims it missold mortgages. "We've asked them where they feel their exposures are and clearly there are a range of regulatory issues that are pending," Budenberg said.

Earlier this month RBS admitted it was holding more capital and putting £38bn of its most troublesome loans into an internal bad bank after a review commissioned by George Osborne ruled out a full-blown standalone bad bank.

Budenberg admitted he had accelerated Stephen Hester's departure from RBS in September. The MPs were told that UKFI had not seen opportunities for a sale of the 81% government stake in RBS in the last two years – which appeared to contradict remarks by the bank a year ago when it raised the possibility of sale in 2014.

Budenberg's successor, James Leigh-Pemberton, indicated that the average price at which the taxpayer bought its stake in RBS – 502p – would not be the only consideration when deciding whether to sell anyshares. "It is difficult not to take it into account but it can't be the only consideration, because when we make our recommendations we also provide it in the context of whether there is an opportunity to realise fair value or more than fair value ," he said.

Leigh-Pemberton said it was "very, very difficult to say with any precision" when a sale of RBS could begin, and it would not be before the £1.5bn dividend access share, which allows the government to receive dividends before other shareholders, is removed.

To demonstrate UKFI's independence from Osborne, Budenberg said he had resisted deep cuts to bonuses suggested by the chancellor on the grounds the reductions were not "commercially acceptable". Budenberg also cited UKFI's influence in convincing Osborne not to force RBS to sell off its US arm, Citizens, too quickly. Citizens is to be spun off next year, probably through a stock market flotation.

"Our view has always been that we need to give Citizens time to recover in terms of its financial performance, and now is a time to begin that process," said Budenberg.

He is to leave at the end of the year after overseeing the sale of the first part of the stake in Lloyds – 4.2bn shares worth £3.2bn – in September at a price of 75p a share. Budenberg said the government could raise another 0.5p per share, or £21m, if more short-term investors, such as hedge funds, had been allowed to participate in the sale.

Budenberg said that UKFI wanted to show it was a responsible seller and that it does not "just sell to the highest bidder".

Further details would be released by the National Audit Office, Budenberg said.

Article Source : http://www.guardian.co.uk
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Elizabeth Warren challenges Obama to break up 'too-big-to-fail' Wall St banks

Amid speculation that she might run against Hillary Clinton in 2016, firebrand senator attacks regulators for multiple failings

Senator Elizabeth Warren cemented her growing reputation as a darling of the political left on Tuesday with a wide-ranging speech challenging the Obama administration to take on Wall Street and break up its biggest banks.

Amid renewed speculation that she might challenge Hillary Clinton for the 2016 Democratic nomination, Warren appeared at a congressional event to attack regulators for failing to tackle the problem of financial institutions that are "too big to fail".

"We have got to get back to running this country for American families, not for its largest financial institutions," said Warren, who said the issue was an indictment of how little had changed since the 2008 banking crash.

The four biggest Wall Street banks are 30% larger than before the financial crisis, she said, while the five biggest institutions hold more than half the bank assets in the country.

Warren claimed this amounted to an $83bn-a-year taxpayer subsidy for some Wall Street institutions, because they were so large that they could safely rely on a government bailout in the event of a future crisis, and were therefore able to take bigger risks than rivals. She also cited research suggesting the crash had cost up to $14tn, or $120,000 for each American household.

The first-term senator from Massachusetts, who led the congressional taskforce overseeing the bank bailout, has repeatedly denied she has presidential ambitions, but growing talk of her potential candidacy has ensured that even is she doesn't run, she will act as a counter-weight to Wall Street financial backing for Clinton.

In her speech to the Roosevelt Institute and Americans for Financial Reform, Warren did not mention wider political ambitions but focused on proposed legislation launched over the summer with Republican John McCain to break up large banks and build on the 2010 Dodd-Frank reforms.

"Where are we in making sure behemoth institutions on Wall Street can't bring down the economy again? And make wild gambles that suck up all the profits in the good times? And stick the taxpayer with the bill when it goes wrong?" she demanded.

"Three years since Dodd-Frank was passed, the biggest banks are bigger than ever, the risks to the system have grown and the market distortions continue."

She said current regulators do not give "much reason for confidence" and added: "It is time to act: the last thing we should do is wait for another crisis."

Warren's remarks came as the White House confirmed that a relatively unknown Treasury official Timothy Massad would replace former Goldman Sachs banker Gary Gensler as chair of Wall Street derivatives regulator, the Commodities and Futures Trading Commission.

Announcing the appointment, President Obama defended what he called "historic Wall Streets reforms" that had already "put in place smarter, tougher common sense rules of the road."

"The markets have hit record highs and there is no doubt our financial system is more stable," said Obama.

"Tim's a guy that doesn't seek the spotlight," he added.

Article Source : http://www.guardian.co.uk
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RBS boss faces results test as break-up looms

Release of third-quarter figures comes amid questions over whether government will recommend hiving off "bad" bank

Ross McEwan, the new boss of Royal Bank of Scotland, will present his first set of results to City analysts this week amid speculation about the future structure of the bailed-out bank.

McEwan, who replaced Stephen Hester at the start of the month, will oversee the release of third-quarter figures on Friday which are likely to be overshadowed by questions about whether the government will recommend hiving off a "bad" bank.

His presentation will come days after the Lloyds boss, António Horta-Osório, also presents third-quarter results amid focus on the share price. The Portuguese banker stands to collect 3m shares – worth £2.4m at current prices – next month if the share price remains above 73.6p until the middle of the month.

That price, which must be maintained for 30 consecutive days, is regarded as the level at which the taxpayer breaks even on its stake. It has traded over that price since mid-October. The government sold off the first tranche of its stake in the bank in September.

George Osborne has commissioned bankers at Rothschild to consider the merits of splitting up RBS into a bad bank containing problem loans and a good bank that can be more easily privatised.

As much as £120bn of the bank's loans is said to have been considered in the review which was sparked by the parliamentary commission on banking standards. Osborne signalled the review in his Mansion House speech in June, seeming to contradict his previous position on a potential break-up of RBS.

In an interview a week ago the chancellor said: "We are looking at the case for a bad bank, and if not a bad bank what is the alternative strategy that really gets on top of the problems in that bank and goes on being what I want it to be which is a bank supporting the British economy."

McEwan has already prepared staff for the outcome the Rothschild review, telling them that the organisational structure of the bank is less important than their day-to-day role in handling customers.

While the chancellor commissioned the report, the board of RBS will have to decide on its implementation. The bank has warned that the government could be prevented from creating a bad bank by other RBS shareholders, who would need to approve any such move.

McEwan is not expected to use the third quarter results to set out his vision for RBS, a bank he joined a year ago to run the high street operations before being promoted. His strategy update is expected to take place in February.

Article Source : http://www.guardian.co.uk
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UK economic recovery built on shaky foundations - again

Growth will depend on easy money, rising debt and a temporary fall in inflation from falling food and commodity prices

Cast your mind back to the last year of Tony Blair's premiership. Growth is strong. The City is booming. House prices are rising. Boom and bust has been abolished. The shops are full to bursting.

Yet something is not right. The economy depends far too heavily on private and, to a lesser extent, public borrowing. Growth is heavily concentrated in certain sectors and in the south-east corner of the country, the manufacturing base is shrinking and the trade deficit is growing.

A book published just before Blair left Downing Street described Britain as Fantasy Island. Its thesis was that the economy was built on shaky foundations and that an almighty crash was coming. Full disclosure obliges me to record that I was a co-author of that book, for which the timing could hardly have been better as the financial crisis began within three months of its publication. My colleagues, somewhat harshly, said that even a stopped clock is right twice a day.

Six years on, it's worth asking what – apart from the arrival of a new government – has fundamentally changed. Is the UK in any better shape now than it was six years ago?

Here's the state of the nation. The economy grew by 0.8% in the third quarter of 2013, the fastest pace of expansion in just over three years. All four sectors, from tiny agriculture, which accounts for less than 1% of GDP, to services (77.8%), expanded, providing hope that the long-awaited recovery will be broad-based.

Scratch beneath the surface, though, and a different picture emerges. The service sector has just about regained all the ground lost during the recession of 2008-09, but the same cannot be said of industrial production and construction. After declining gently in the eight years leading up to the recession, industrial production subsequently contracted by 12% and after a double-dip downturn is now 15% below its peak. Construction has shown a similar profile. Activity flat-lined in the four years before the crash, dropped by almost 20% and is still 15% down even after the recent pickup.

As a result, the economy is even more sectorally unbalanced than it was before the financial crisis, and because the service sector is loaded towards the richer parts of the UK, more geographically skewed as well.

There are four ways in which an economy grows. Companies can decide they need new kit (investment); Britain can sell more overseas than other countries sell here (net exports); the state can play a bigger role (government spending) or households can spend more (consumption).

It has been the last of these sources of growth that has driven the rise in GDP since the turn of the year. Prices have been rising more rapidly than earnings, but that has not stopped consumers for going out on a bit of a spree. They have dipped into their savings and started to respond to the offers of unsecured lending, which, after a lull of a few years, have started to drop onto the doormat once again.

Consumer confidence has improved and the housing market has come back to life. Mortgage approvals are up, transactions are up and prices are up. The next thing to look out for is the return of equity withdrawal, borrowing against the rising value of a home.

When he was shadow chancellor, George Osborne used to express grave concern about what he considered Labour's flawed economic model. So did Vince Cable, in even more forceful terms. Accordingly, the strategy of the coalition was double-barrelled: less public and private debt, coupled with a greater reliance on investment and exports.

Things have not gone to plan. Business investment fell by 25% during the slump of 2008-09 and has flatlined ever since. Instead of splashing out on new plant and machinery, companies have employed more cheap labour to meet demand. Britain is a nation of zero-hour contracts and an ageing capital stock.

For the past three decades, UK trade has been the story of a growing deficit in manufactured trade offset by surpluses in oil, services and investment income. This picture has, however, changed in recent years. Oil can no longer be relied upon to balance the books and nor can investment income, which has declined markedly since the start of the financial crisis. A cheaper pound has made a slight dent in the deficit in goods, but weak growth in Britain's main market – the eurozone – has meant that the impact of the depreciation has been far more limited than in the past.

Britain has historically had a comparative advantage in traded services such as banking, insurance, consultancy and law, and runs a quarterly surplus of around £20bn. But this is still not enough to cover the deficit in goods, which runs at around £25bn a quarter.

Recovery begins with the nation's current account in a poor state, and the hollowing out of the UK's industrial base makes it a cast-iron certainty that a consumer-led recovery will suck in imports and crowd out exports.

Over time, these structural weaknesses in the economy will be exposed. In the short-term, however, the economy will continue to grow at a fair old lick. It is quite conceivable that a combination of easy credit, a pickup in investment and a recovery in world trade will lead to growth in excess of 3% next year.

Cheap borrowing will continue. The Bank of England has been surprised by the strength of the economy since its last inflation report in August, and Threadneedle Street is in no hurry to bang up interest rates too quickly, for fear of choking off the recovery.

Investment is the big imponderable. If businesses believe the increase in consumer demand or world trade is for real, they might decide the time is right to invest more. Parts of the corporate sector are cash-rich, so this might happen. But only if firms are sure that the brakes are not going to come on after the general election, when the Bank of England may decide to do something to rein in the housing market.

A big boost from world trade looks unlikely for the time being. Europe has a broken-backed banking system, the US a dysfunctional political system and the expansion of China and some of the other leading emerging nations is starting to slow. Ahead of the financial crisis, the global economy was growing at 5% a year. The new normal is around 3% a year, making an export-led recovery problematic.

Most likely, growth will be dependent on easy money, rising debt and a temporary fall in inflation prompted by falling food and commodity prices. It may take a couple of years before Britain again steams into the harbour on Fantasy Island, but if you look toward the horizon it's easy to see the palm trees swaying in the breeze.

Article Source : http://www.guardian.co.uk
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RBS releases documents over alleged currency manipulation

FCA scrutinising allegations of large banks' abuse of currency benchmark potentially involving a former RBS trader

Royal Bank of Scotland has handed the City regulator messages sent by one of its former traders in the latest twist in an investigation into potential manipulation of currency rates.

The Financial Conduct Authority (FCA) began an investigation into the £3tn-a-day foreign exchange market in June following allegations that traders at major banks had found ways to manipulate a closely followed currency benchmark.

Swiss regulators have also begun to scrutinise the foreign exchange markets, regarded as among the most liquid in the world, sparking speculation that a number of major banks are facing questions about the way they traded leading currencies.

"It's a fact that foreign exchange manipulation was committed," Swiss finance minister Eveline Widmer-Schlumpf said.

The investigations are the latest attempts to clamp down on potential abuses of financial benchmarks, first highlighted by the Libor rigging scandal in June 2012 when Barclays was fined £290m for manipulating the key interest rate. RBS has also been fined for Libor rigging, as has Swiss bank UBS and more recently the broking firm Icap run by former Conservative party treasurer Michael Spencer.

The potential involvement of a former RBS trader in currency manipulation was reported by the Bloomberg news agency, which had first reported the potential for abuse of a currency benchmark operated by WM/Reuters and used by fund managers to value their investments. Traders at major banks were said to be putting in client orders ahead of a 60-second window when the rate is set by the benchmark. The benchmark rates are published hourly for 160 currencies and half-hourly for the 21 biggest currencies, including sterling, which are set by calculating the median price of trades taking place during the 60 seconds.

RBS would not comment on the Bloomberg report that it had handed the regulator instant messages sent to and from a currency trader who no longer works for the bank. The trader had left before any questions were raised about potential manipulation of benchmarks.

The FCA, which also would not comment, is said to be asking for information from Deutsche Bank, Citigroup and other banks in relation to the currency markets. The regulator is gathering information but has not begun a formal investigation; it is not yet clear if any firms are under any investigation that could lead to fines or other sanctions.

As well as interest rates and currencies, energy markets are also being investigated. The FCA began to look at gas prices after the Guardian reported that the £300bn wholesale gas price was potentially being manipulated while the European commission has also raided the offices of major energy companies amid allegations that oil prices were rigged for a decade.

Article Source : http://www.guardian.co.uk

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