How to prevent the RBS sale

I was a little surprised about the decision to flog Royal Bank of Scotland, but you'll have to bear with me while I explain why.

It seems to me inconceiveable that the Treasury or the Bank of England haven't conducted a recent review into the solvency of RBS. If it had been solvent under the coalition, they would have tried to sell it. They didn't. Ergo: it isn't.

My understanding from those who know about such things is that the bank was so dysfunctional, only a few years ago, that there was no discernable 'good bank' from the debts. RBS was a basket case, hopelessly indebted, with skeletons in most of their cupboards.  It almost certainly still is.

I explain this as a commentary on George Osborne’s decision to try and sell the bank back to the City investors at a hefty loss, which in recent days has been rumoured to be around £13 billion.

It is true that Williams and Glyn’s has been hived off, so it may not be quite the giant walking disaster it was, but it is no less of a walking financial disaster.

The question is what we should do about that. Osborne is taking the boneheaded Treasury solution which is simply to throw it back from whence it came, washing their hands afterwards. It is the path of least imagination, given that they are bound to lose the £13 billion anyway. Or so they believe.

But there is an alternative.

One which appears to be emerging across the political divide is to do something useful with it – to use it as the basis for the effective local lending infrastructure that the UK so badly needs, and which the rest of Europe already has.

The track record of RBS on small business is patchy and corrosive. Spewing the bank out again just as dysfunctional as it was implies a sort of lassitude, a kind of lazy hopelessness, about rebalancing the economy. Perhaps they don’t want to any more.

I know the Treasury's view on local banking: that the market will innovate. I also know the view of BIS: that the challenger banks are already emerging.

These are both correct, but they are emerging to support only one kind of business. There will always be space for challenger banks to cover the wealthy areas, or for peer-to-peer lenders to provide finance for fast growing high growth potential start-ups.

But what about the rest, the ordinary small businesses that are the backbone of local economies over most of the regions? These are the places that are least well served by the handful of mega-banks we rely on for nearly everything in the UK - and which no longer want SMEs as clients. Because they no longer have systems that can assess their risk effectively.

It isn't the financial problem. They are no longer set up to tackle the information problem that SMEs represent.

Yet here is RBS, useless, indebted and dysfunctional, and available to reshape into the beginning of the network of banks with boots on the ground, which practically every other developed nation has. 

How do we achieve that?  First, prevent such a wasteful, unimaginative sale?

Here are my three suggestions:

1. Ask the Treasury to reveal the results of their evaluations about alternatives to a fire sale.  They must have done them - and if they haven't - they should do so immediately.

2. Encourage investigative journalists to build on the work the brilliant Ian Fraser (author of Shredded) to reveal the true state of RBS.

3. Make sure potential investors are clear they are being offered a struggling dinosaur from another age, and that they also demand that the Treasury reveal everything they knew about the reality of RBS debts.

Nobody should suggest that RBS should stay permanently in government ownership.  This isn't a privatisation issue. It is about using the power of information and the market to make sure we don't just return to the pre-2008 position and waste this opportunity.

The campaign has to be led from inside Parliament.  It requires one of this myriad of leadership contenders to announce that they will use Parliamentary privilege to prevent the sale.

It is bold, so that may rule out the Labour Party. But they can reasonably claim that they are acting in the interests of the vast majority of businesses in the UK, who need a functioning banking network - and don't currently have one.

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