So they could improve their own balance sheets
Lawrence Tomlinson
The UK’s two State-owned banks have been accused of ruining thousands of small firms by using unscrupulous business practices, according to a report commissioned by Business Secretary Vince Cable.
The report concludes that Royal Bank of Scotland (82% taxpayer owned) and the Lloyds Banking Group (43% taxpayer owned) have cynically caused many businesses to collapse as a result of their decisions.
The report accuses RBS of, and I quote, “acting like a hit squad, by deliberately causing healthy businesses to go bust for the bank’s personal gain”. In essence, the bank withdrew lines of credit from previously solvent firms by charging enormous fees and charges so it could then grab their assets at fire-sale values; the report is almost equally scathing about HBOS, part of the Lloyds Banking Group.
The report was written by the government adviser, entrepreneur Lawrence Tomlinson, is a horror story of viable businesses forced into insolvency and owners bankrupted by bankers who were insensitive at best and rapacious at worst.
The Royal Bank of Scotland, along with HBOS, are the banks that lent most to small and medium size businesses. In the years leading up to the crash the two banks went crazy in their lending to businesses, based on pie-in-the-sky property valuations. In fact around 80% of their lending in the five years to 2008 had a property element.
Inevitably, given the collapse in property values that began in 2007, tens of thousands of their customers got into difficulties. The countless billions of pounds of losses incurred by RBS, that almost sunk it and the only slightly smaller losses by HBOS, are testament to the mind-boggling number of staggeringly reckless corporate loans they advanced before the roof caved in.
Should we be surprised that, given the scale of the mess the banks created that in the process of trying to climb out of the financial hole of their own making, they foreclosed on many businesses that did not deserve it which has been an absolute tragedy for thousands of innocent victims?
There is now doubt that both banks will thoroughly deserve whatever punishment regulators now decide to impose but there is a conflict between what Vince Cable wants, which is more sensitive treatment of businesses hurt by recession, and what the Bank of England has been urging banks to do.
You may recall that the BofE, under the previous governor Lord King, had been concerned that the banks’ ability to support potentially exciting new businesses had been hampered by the extent to which their capital was locked up supporting hopeless cases, known in the trade as zombie businesses. The Governor was particularly concerned that RBS had too many businesses on life support that would never recover and believed that the best thing to do would be to put them out of their misery.
Are Bailed-out British Banks behaving like 18th century Cornish wreckers?
The problem was how to you draw a distinction between a business temporarily hurt by a downturn in the economy and one that is fundamentally uncompetitive and on permanent life-support. The process can never be completely scientific and infallible, but the two banks in question and the RBS in particular, were clearly guilty of heavy handiness and blatant self-interest in seizing temporarily under-valued assets, whilst ignoring the fact that they would be destroying perfectly viable businesses that were having temporary difficulties.
Last week Tomlinson, told Channel 4 News: “We’re really concerned that many businesses aren’t really struggling, but often extra fees and exorbitant charges tip them over the edge into administration, and then you’ve got the loss of jobs but RBS end up owning the property”.
As Tomlinson says, what this whole sorry saga has once again highlighted is how poisonous it is for British business and the British economy that there is so little choice when it comes to the provision of banking services and credit for smaller companies. He also considers that a lack of competition in banking may be the underlying poison in this sorry mess.
His report concludes with a recommendation that RBS and Lloyds be made significantly smaller, removing conflicts of interest within the banks, and creating a number of smaller, purely retail commercial banks who understand their customers.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.