At the end of May, the government announced the sale of our remaining stake in the Royal Bank of Scotland (RBS). Nearly two decades after we as taxpayers bought the bank in the teeth of the Global Financial Crisis of 2008, we have lost £10billion.
That is a huge amount of money, about a third of our total annual defence spending (pre-NATO increases). We might have made £900million on our stake in Lloyds but that only offsets a small part of the RBS loss.
It is extraordinary that we have lost this much on bailing out a single bank, but it is worth remembering why Alistair Darling and Gordon Brown bought it in the first place.
At one point, despite its brand, Royal Bank of Scotland was the single largest bank in the world. Excessive risk taking by senior executives had expanded it to the point of maximum exposure as bad loans started to topple the whole sector.
The bail out of RBS wasn’t really about saving jobs (these have fallen by nearly 3/4rds) or nationalising the bank’s risk taking (although it did in effect do this), it was about preventing the collapse of UK society.
That seems like hyperbole now with the benefit of hindsight, but at the time the government were worried about riots and looting as soon as credit/debit cards and cash points stopped working.
The UK had managed to build a banking sector to a larger proportion of its economy than most other Developed countries and was seriously exposed when they started falling like dominoes.
The alternative would have been to let RBS collapse and inject taxpayer money into the Financial Services Compensation Scheme. This would have led to RBS shareholders taking the financial pain and most deposit holders having their money protected by the FSCS. In reality the bank was so inter-connected with other businesses and banks, that a collapse could have set off a chain of further collapses. The risk with this strategy would be the unknowable extent of job losses and long-term damage done to UK companies.
Unfortunately, the bail out and all of the government intervention subsequently needed still echoes today. It was a global event, created by bankers taking risks they didn’t understand. It led to the distortion of the global economy through bailouts, money printing and austerity. Whilst not the sole reason for the current levels of government debt, threadbare state institutions and wealth inequality, it increasingly looks like a starting point.
The hope is that the major banks have learnt a lesson, and that it is not that they can take the profits and taxpayers will step in and cover the losses. Big banks are better protected by larger cash reserves than they were.
Risk takers will always find a way to make a profit though, and some of those individuals have taken their risks into the shadow banking system. The shadow banking sector is less well regulated and is made up of hedge funds, insurance companies, currency exchanges, investment funds and cash dealers. It has doubled in size since the bailout of RBS to circa £50trillion in assets.
This sector isn’t covered by compensation schemes or the protection of central banks and we can only hope that risks aren’t building up as they were in the big banks prior to 2008. This time around, it is hard to see that governments have the funds or the public support to step in again.