BANKING CRISIS
Programme : NEWSWEEK SCOTLAND
Station : BBC RADIO SCOTLAND
Date : 9/7/11
Time : 08:15
Duration : 21 MINUTES
DEREK BATEMAN: Presenter
Last week we heard Professor Andrew Hughes Hallett of St Andrews University saying that Scotland would only have been liable for an affordable fraction of the Scottish bank bailout. That contradicted an answer given in the Commons by the Scottish Secretary Michael Moore. He’d agreed with a Tory backbencher that the scale of the banking crisis meant that Scotland could not have afforded to bailout the banks and would have faced a crippling economic burden. Well, this is already shaping up into a key debate ahead of the independence referendum. We’ve now asked Mr Moore twice to come on to be interviewed but he’s not available to us. However, we wondered if Professor Hughes Hallett was a lone voice on this matter. We put out a kind of all points appeal for Professors of international banking in Britain and turned up five. I spoke to two of them; first George Walker, Professor in international financial law at the Centre for Commercial Law Studies at Queen Mary University London, who is also Professor in financial law and regulation at Glasgow University.
GEORGE WALKER: Professor in financial law, Queen Mary University London and Glasgow University
There are no formal rules for the allocation of market support costs in the event of the failure of a major financial institution on a cross border basis. We have provisions governing the allocation of supervisory responsibility and for cooperation and the exchange of information, but not for the formal allocation of support or recovery at the international level. There is a committee which is the Basel Committee on Baking Supervision in Basel Switzerland, although it has no formal authority on matters governing support costs which are reserved to the Central Bank governors directly. There is a European Union memorandum of understanding on cross border financial stability of June 2008 which does set out procedures for managing cross border crisis within the EU. This does refer to the sharing of direct budgetary costs with the finance ministries affected being required to consult and reach a provisional agreement on the sharing of post-crisis costs in each case. No detailed criteria are nevertheless provided on how this should be calculated due to the sensitivity of the issue. Only general principles are expressed if you’re interested in paragraph 34 and paragraph 21, which include sharing on the basis of equitable and balanced criteria, taking into account the economic impact of the crisis on the countries concerned and the allocation of host and home supervisory powers. In this particular case that we’re discussing, it would presumably then have to be calculated having regard to where the various subsidiaries and business operations of RBS and HBOS were located in England and Wales and Northern Ireland, with Edinburgh only then assuming a proportionate share of around, possibly, only five percent of the total costs concerned.
DEREK BATEMAN:
So, the key thing here, really, on a UK basis as we’re currently constituted is that the bulk of the business, clearly, and for obvious reasons is done in the City of London and the bulk of the bailout would fall on the government there.
GEORGE WALKER:
I agree entirely. I mean, with regard to the decision as to whether to provide support or not the Bank of England and Her Majesty’s Treasury would have looked at the stability of the London markets and of the larger UK financial system and taken the necessary decision on that basis alone. This decision was not taken to protect either RBS or HBOS nor specifically the Scottish markets but to protect the financial stability of the UK financial system as a whole.
DEREK BATEMAN:
This is a kind of ‘what if’ question and to a degree it’s obviously theoretical, but had Scotland been a friendly, presumably, independent state perhaps in 2005, before the catastrophe began in 2007/2008, would any of that have been different?
GEORGE WALKER:
If Scotland had been an independent member state within the EU, the Treasury would have been obliged to consult with Edinburgh under the paragraph I referred to before. But, I think what’s more likely to have happened in this particular case, is that we would have retained the Bank of England as the single central bank with a single common currency and, presumably, a single regulatory system and so any cost allocation would have been solely a matter for common agreement with the EU not being strictly applied. And again, I would then have thought that it would be on a proportionate basis of only around five percent.
DEREK BATEMAN:
Politics is wrapped up in this and that’s part of why we’re doing this story, but would part of it be an imperative, obviously to save the City of London from crashing but also not to wreck the Scottish economy, because we’re so deeply integrated that would be a disaster for England too.
GEORGE WALKER:
We clearly have common interests and I’m absolutely sure that the Bank of England and the Treasury would have wanted to support the whole of the UK financial system. There is no way that we could have had any form of separation in such a way that the Scottish economy could have been allowed to collapse on its own.
DEREK BATEMAN:
And, the idea that the full cost of bailing out, particularly, RBS because of its scale – you know, falling on Edinburgh because that’s where the brass plate goes, what do you think of that idea?
GEORGE WALKER:
I don’t think that’s relevant at all. RBS is a large, complex group; it is a large of subsidiaries; banks and other financial institutions, which are amongst the most distinguished in this country. Many of those subsidiaries operate out of London and only out of London. I don’t think you can, simply, look at it purely on the basis of where, as you point out, the brass plate of the holding company is.
DEREK BATEMAN:
Could I just turn you lastly onto another area which I’m not sure people fully understand, and that’s about just how much of the bailout, which is enormous, you know hundreds of billions of pounds in total when you look at it; how much of it is real money, because most of, surely, is a contingency; it’s basically the Government promising to pay on the basis of an insurance policy if the banks default again.
GEORGE WALKER:
Well, I agree entirely and strictly speaking the contingent liability you’re only talking to only refers to the guarantees that were provided for the toxic or distressed assets. What the Government actually did in terms of providing most of the support was actually purchasing preferred stock in each HBOS and RBS. In terms of recovery, there was no strict bailout in the sense of a gratuitous non-recoverable payment; this was a commercial investment banking decision taken on investment banking terms. The Government purchased shares in both banks when they were worth a fraction of their previous market value, possibly of only around five percent. They also then imposed a high dividend of, I understand, originally around 12 percent on the preferred stock that was purchased. Any other support facilities were also charged at full commercial rates such as the £6.5 billion charged to RBS for the guarantees. The London or the Edinburgh governments would have recovered in full all of their investments in time.
DEREK BATEMAN:
Then I turned to a man who started his career in the Salt Courts branch of the National and Commercial Bank, since absorbed by RBS. He is now Professor Andrew Campbell, Professor of international banking and finance law at Leeds University.
ANDREW CAMPBELL: Professor of international banking and finance law, Leeds University
Believe it or not, there is no real international agreement on what should be done in these situations, nor is there any international body of law to govern what should happen in these situations. So, the reality is throughout hundreds of banking crisis we’ve seen over the centuries, the reactions to each have tended to be different.
DEREK BATEMAN:
Is there some sort of form or president? One of the recent ones we remember is 2008 in three European countries was the Fortis Bank where that was, basically, divided up – you know the responsibility for doing it was Belgium, France and the Netherlands.
ANDREW CAMPBELL:
Yeah, now again that was done more by just agreement between the parties rather than by following any particular set of laws or precedents that are laid out; unfortunately, one of the very early stages of developing a rational approach to cross-border bank insolvency
DEREK BATEMAN:
What you’re suggesting is there would be negotiations. I mean, I for example Scotland had been separate independent from the rest of the UK and this crisis had occurred, is the logic that both governments would have talked to each other because they’ve got a mutual interest in saving, mainly, RBS.
ANDREW CAMPBELL:
Absolutely, one would expect that the two governments would speak to each other in that situation. It raises a lot of other issues too, because if Scotland were independent it may well be the case that Scotland would be a member of the Euro…
DEREK BATEMAN:
That’s another problem you’ve presented us with right there.
ANDREW CAMPBELL:
…Absolutely, and of course Scotland would then have its own banking regulators. Now, it is very true to say that in the situation with regard to RBS that this was a Scottish institution but being regulated from London. Halifax, Bank of Scotland; more complicated because, although in theory, you could say it was still a Scottish bank, the reality was that a lot of the business was still in my part of the world around Leeds and West Yorkshire.
DEREK BATEMAN:
But you mentioned that you don’t hear about it, I suppose one consolation of being in the Euro would have been that there would have been Brussels funds to dip into if there had been a problem.
ANDREW CAMPBELL:
Yeah absolutely, there would have been a Euro-wide approach to dealing with this so that would have raised a number of other issues, many of which are also not entirely clear because we are really in uncharted territory with a lot of this. This has not been dealt with before. We are now seeing a lot of initiatives being discussed and it’s worth pointing out that as far as cross-border bank insolvency is concerned within the EU, we do have a directive which sets out how the legal procedures should be undertaken and how the different parties, the different member states, should cooperate with each other. What it doesn’t do though, is discuss anywhere where the losses should be allocated in terms of which government should pay for what.
DEREK BATEMAN:
What do you make of the logic…we heard last week from Professor Hughes Hallett who said that, broadly speaking, he thought that…well, he said more or less a precedent, would be that if you had, for example, 90 percent of your business in one sovereign state with one regulator that you would divide up, you know, the liabilities broadly along those lines.
ANDREW CAMPBELL:
I would not disagree with the logic there, but there is no actual legal precedent to cover that situation. Again, this would be the subject of negotiation between the different governments.
DEREK BATEMAN:
Could we just say about the bailout in general that the real purpose of it wasn’t so much just to save the banks because they are businesses but it’s more strategically important that those banks don’t’ go down.
ANDREW CAMPBELL:
There are a lot of issues to discuss around that sort of area. I mean one of the reasons for trying to keep systemically important financial institutions alive and kicking is that they play very important roles, for example, in the payment system. If they fail, the payment systems could, perhaps, fail. Now, a lot of interesting work has been done on this subject about how to protect functions and not necessarily institutions, that may be the most important thing to do is make sure the payment system can still operate but not necessarily been operated by the same bank that has got into difficulties.
DEREK BATEMAN:
What do you make of this idea; we’ve heard from ministers, actually, that Scotland simply could not have coped with the scale of the bailout – and I think that’s purely based on ascribing the full cost to Edinburgh rather than to anywhere else – and that Scotland would, therefore, have ended up like Ireland, Iceland or Greece is the argument. And yet, we have quite a different economy from those countries, don’t we?
ANDREW CAMPBELL:
I mean I’m not an economist; I’m a lawyer, so I can’t really speak for economic issues but the reality is that the situation should never have been that Scotland, if it was independent, would have to foot the bill for the entire amount of rescuing Royal Bank of Scotland. The reasons for that would be that Scotland would have a separate bank regulator that would have been looking after the banking interests north of the border; whereas the English and Welsh are…probably the rest of the UK regulator would have been regulating what was going on throughout the City of London. So, it would be inconceivable that Edinburgh or Scotland as a whole could be held liable for that full bill. I know we’re talking about a scenario which doesn’t actually exist, but I really don’t think Scotland could be held liable in that situation.
DEREK BATEMAN:
Another interesting point was the Prime Minister said this week that it was important that Britain had helped to bail out the Irish banks because our economies were so well integrated. Well, wouldn’t that same principle apply between Scotland and England?
ANDREW CAMPBELL:
Absolutely, I think that was a very pragmatic statement by the Prime Minister. George Osborne has already made that point as well; that when neighbouring economies are so interconnected then there is a clear interest in helping each other out whenever there is a crisis.
DEREK BATEMAN:
Andrew Campbell. Well, if you want to read the statement Mr Moore issued to us last week, it’s available on our blog at Newsweek Scotland blog. In his absence we contacted the Tory MP who had asked the original question Philip Hollobone; he wouldn’t be interviewed either. However, on the line now is the man who was at the helm at the Treasury at the time of the bailout, the former Chancellor, Alistair Darling. Good morning.
ALISTAIR DARLING: Former Chancellor of the Exchequer
Good morning.
DEREK BATEMAN:
Now, nobody was closer to this than you Mr Darling. You’ve heard what the professors had to say, what’s your view?
ALISTAIR DARLING:
Well, I think it’s a lot of wishful thinking here. The thing that you’ve got to remember about these multi-national global banks is, as the Governor of the Bank of England said at the time, they are global in life but national in death. So, when they get into trouble, the buck stops with the home country. Now, let me give you an example; you’ve been talking about RBS. RBS lost a lot of its money, not in the UK or in London, but in the United States. And, when the bank went down we in Britain had to put capital into RBS partly because of losses it was making through its American subsidiaries. So, I think the idea that if a bank got into trouble that you could go to countries where it was actually operating and say: “Hey come in, chip in a little bit”, is a little bit fanciful. And, one important point here; George Walker refers to an agreement that was reached in the European Union in 2008; I was there. I know that is a very high level agreement; nothing actually in tangible terms was ever agreed; it was driven by the fact that Poles were bothered about having to pay for French or German banks. Naturally, France and Germany were not too keen to become involved in this. And, as Professor Campbell said there is no international agreement. I hope, one day there will be one because if this was ever to happen again, whether it was the UK never mind Scotland, the burden of having to recapitalise multi-national banks is immense. Yes, we’ll get our money back as, I think, both professors said but you’ve got to understand here that at a time of crisis I’m afraid the buck stops with the home state. And remember, this crisis wasn’t made in London; it was made in the boardrooms in Edinburgh. I’m afraid this was a home grown thing, so the idea it wouldn’t have happened if Scotland was independent simply doesn’t wash.
DEREK BATEMAN:
Didn’t the Americans though, didn’t the Fed put in hundreds of billions into the banks in the States?
ALISTAIR DARLING:
Yes they did but there are several different elements here if you like. Both the Fed, and the European Central Bank, and the Bank of England, indeed other central banks, made money available to put money into the system to keep it going. But, the actual capital that had to be put into RBS and into HSBOS, or now the Lloyds Group, that came from the UK taxpayer. It’s all very well that you say, well, look at Ireland. Yes, let’s look at Ireland because it’s worth considering the facts there. A lot of the Irish banks losses were made not in Ireland but in the UK because they got into some pretty foolish lending here as well. Yes, they did get money directly from the UK last December, but that’s in the context of a country that had to go through the IMF and the European Union to be bailed out. We don’t want Scotland to be in that position. Now, I would dearly like to be in a position where we have got in place mechanisms that avoid one country being landed with the burden of looking after a multi-national bank but I’m afraid we’re not there yet, and the idea that all the benefits of independence would accrue to Scotland but all the dis-benefits; London or England would come and bail it out, that surely wouldn’t stand up at all.
DEREK BATEMAN:
But, if RBS in particular which is the big one; had that gone down, that would have had a very serious contagious effect to it across the City of London.
ALISTAIR DARLING:
Well, absolutely which is one of the reasons that we had to bail it out, but again, let’s give you another example; Lehman’s Bank which was one of the biggest American banks; it went down, and we know that it set in place a chain of events that brought the entire world’s banking system to its knees. Now, we didn’t’…you know, it was the American decision as to whether or not they put money into it. Wrongly, in my view, they decided not to and we had, along with other countries, bear the consequences. There was never any possibility that countries around the world would say, OK, we’ll put in a bit here, a bit there, to keep Lehman’s going. I’m afraid, at the end of the day these banks belong to the countries in which they’re situated. That situation may change in the future, but it’s not there yet.
DEREK BATEMAN:
I was just trying to imagine the scenario though where, you know, Scotland was separate and you were still, bizarrely, the UK Chancellor, and Royal Bank was threatened and the view, which we have heard from Mr Moore, was that the full cost of, say, £470 billion would fall on Scotland; that would mean that RBS couldn’t survive and you, as Chancellor, would say, well, hard luck.
ALISTAIR DARLING:
Well, remember if Scotland was independent it would be a foreign state as far as England or the rest of the UK was concerned and its attitude therefore would be exactly the same as an Irish bank or, take the Icelandic banks…
DEREK BATEMAN:
But we did alert the Irish banks, and as David Cameron said, there was a very clear national self-interest there.
ALISTAIR DARLING:
Yes, but that was in the context of Ireland having had to go to the IMF to be bailed out; having to go to the European Union to get funds to carry on trading; we don’t want Scotland to be in that position. But, my point in reply to your perfectly reasonable question is, when the Icelandic banks were collapsing or the Irish banks were collapsing, Ireland and Iceland didn’t come to Britain and say, look, please bail them out. Of course it was in all our interests, and indeed the whole point of what was going on in 2008 when I was there, it was to stop the world’s banking system from collapsing. But unfortunately, RBS, had it gone down, you’re dead right it would have brought the rest of the banking system with it. The buck stopped with us because this happened to be a British bank even though a lot of its losses were incurred overseas.
DEREK BATEMAN:
When you said a minute ago that there was, I think it was £65 billion wasn’t it that went in, and you said…you know, sort of taxpayers money. I mean, it wasn’t really was it? Wasn’t that just borrowed on the money markets? It’s a long term loan we’re paying back; in other words we didn’t’ have to find £65 billion.
ALISTAIR DARLING:
Well, it was borrowed off the back of the credit of the United Kingdom government which is one of the largest economies in the world and we’re able to do that. Look at the problems; Iceland, Ireland…I think Greece and Portugal are in a slightly different position…Basically, if markets think we are taking on a hell of a risk for a small country, then the amount you’re going to be charged goes up. And indeed, never mind Scotland, actually one of the issues that’s going to have to be resolved in the next couple of years or so is that if you take any large economy; the UK, France or Germany whatever…even the United States; if we had another crisis like 2008, you are asking a great deal for these countries to actually bail out the system again. So, this is an urgent problem that needs to be resolved internationally. The point I’m making in the context of your discussion you were having this morning is there is no such international agreement at the moment and I can tell you countries are not queuing up to bail out other countries banks.
DEREK BATEMAN:
Can I ask you just very, very briefly and lastly; is it interesting that the professors are on one side and the politicians are arraigned on the other?
ALISTAIR DARLING:
Well, I listened to the professors very carefully and both of them made the point, there are no formal rules and that we just hoped that something would happen. Now, I agree, I hope that something would happen if this thing ever happens again. But, in the context of debates about, you know, would Scotland be better off independent and so on, you’ve got to understand that, as I said, this crisis was made in Edinburgh as far as these two banks are concerned. We were not immune from the foolishness that pervaded the bank boardrooms, and unfortunately because there is no international agreement, the buck would stop with us and I do not want to be like Ireland or Iceland, the former members of the Arc of Prosperity, who are in deep, deep trouble because their banks overstretched themselves; they were too large in relation to the size of those countries; and I’m sorry, that’s the reality of the situation.
DEREK BATEMAN:
There’s no leader for the anti-independence campaign. In a word, could it be you?
ALISTAIR DARLING:
Well, I am sure there are many people in Scotland me included who, when it comes to the referendum – and I’ve been on record that if we’re going to have a referendum why not have it now – I believe, passionately, that Scotland’s best interests lie both within the European Union and within the United Kingdom and I will play a very, very active part in that as will everybody else who has Scotland’s interests at heart.
DEREK BATEMAN:
OK, well thanks for at least turning up to speak to us this morning. That was Alistair Darling.
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