Finance for the common people?

In terms of ownership and control, Scotland’s banking system emerged much the poorer from the financial crisis, with LloydsTSB acquiring Bank of Scotland (BoS) and the Royal Bank’s (RBS) being effectively ‘nationalised’ (or at least its debt). In this context, threats from the likes of RBS in the run up to the referendum to re-domicile south of the border effectively resulted in Scotland being held to ransom. Here, Chris Sharpe discusses some of the issues related to Scottish banking with a former director of corporate banking at one of Scotland’s big three.

Starting with ownership, how did Scotland lose control of its banking system?
There are a number of reasons: the creation of a global banking system, various mergers (which in hindsight seemed ill-advised) coupled with some bad strategic decisions, and finally, the cultural and operational changes at RBS and BoS that saw a shift from ‘telling’ to ‘selling.’ All this contributed to the catastrophic failure of the banking sector, particularly RBS and BoS. Before 2008, both were involved in major mergers (or take-overs, depending on your perspective). Since then, the real centre of power has started to move south of the border. Even though both banks have kept their corporate headquarters in Scotland, there has been a real sense that the major strategic decisions are starting to be made elsewhere.

The crisis exacerbated the issues facing the banks, cutting off access to vital wholesale funding. In simple terms, the hamster had fallen off the wheel and the banks had to go cap-in-hand to the Government and the Bank of England for a bailout. The rest is history. It was probably the day neoliberal capitalism died, although those involved would not admit it.

What are some of the financial and political implications?
The implications are already clear. The huge number of job losses in the banking sector since 2008 have been well documented. Less so, however, is the number of middle and senior management roles at RBS and BoS that have either been made redundant or relocated south of the border, leaving few if any in Scotland. With strategy and decision-making processes moving south, the country now feels more like an outpost than a major financial centre. Both banks had been chipping away at their cost bases for many years by employing new technology, deskilling their workforces and training new recruits for a much narrower range of functions. Scotland’s banking sector now comprises younger, lower-skilled staff earning lower wages than the old highly-qualified specialists and back-office support staff. One consequence of this is that Scotland now has an army of redundant bankers that would be able to add real value to a well organised and functional Scottish banking system.

The threat by RBS in the run-up to the referendum to re-domicile south of the border angered many customers, yet does Scotland have any real alternatives in terms of retail banking?
RBS’s statement was just that, a threat, and one they would in all likelihood have had a great deal of difficulty in carrying out. With the UK government owning 80% of its shares, it’s hardly surprising the CEO felt obliged to add some negative noise to the referendum debate.

Really though, why would organisations like RBS want to move from a country where they have had a dominant market share for decades? Despite all the upheaval in recent years, there remains very little competition in Scotland. The banks may make the right noises when it comes to customer service, but in all honesty the customer is still far down the pecking order of priorities.

A fundamental part of the viability of any nation lies in having its own banking system. Going forward, how can the situation be improved in Scotland?

The crisis in 2008 was caused by banks that had become too big to fail. The challenge we face is to build a banking system such that if one bank fails, it doesn’t bring down the rest. To do so, we need a number of smaller banks catering for the real needs of retail and commercial customers rather than the financial behemoths at present. It would be nice to think that a new generation of Scottish banks could get back to providing some good old-fashioned service based on the traditional values of Scottish banking. Another major issue lies in having a central bank to act as lender of last resort. Scotland was heavily involved in setting up the UK’s current system and there’s no reason we couldn’t do it again, only this time on our own. It raises lots of issues but it also presents fantastic business and social opportunities. We have the people, the technological know-how and, most importantly, the incentive to leave a robust banking system for future generations. An oil fund of the type proposed by the SNP would be a considerable asset in funding such an enterprise.

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