Political meddling into RBS will hurt the taxpayer

82 per cent state owned RBS is coming under continued assault from chancellor George Osborne. Our banking reporter Tim Wallace:

Good performance in RBS’ markets unit ( investment bank) boosted operating profits. Yet it is cutting the unit under pressure from Osborne.

— Tim Wallace (@Tim_Wallace) February 28, 2013

Osborne’s political ambitions are clashing with what makes business sense here. That investment banking is politically unpopular is largely due to a misconception about the role of investment banks in the financial crisis. Frances Coppola explains in the Forum:

The popular belief is that retail deposits, instead of being used to fund “safe” traditional retail lending like mortgages, were used to fund high-risk derivatives trading on the international capital markets. This belief is now driving calls – including yesterday from George Osborne – for the structural separation of retail and investment banks. Separate retail and investment banking, so the thinking goes, and retail deposits will be safe.

Nothing could be further from the truth. At the time of the crisis, only three UK banks had investment banking arms – Barclays, HSBC and RBS. The rest were retail banks. Northern Rock, Bradford & Bingley and HBOS/Lloyds – all three were bailed out, but none had a significant investment bank. But that didn’t mean they were isolated from wholesale and investment banking activity, or from the capital markets. Far from it. They were dependent on them. You could say the dependence of retail banking on securities issuance and overnight wholesale funding was the banks’ real problem in the crisis.

(Full article)

By yielding to Osborne’s requests for politically popular moves, RBS will see its financial situation worsen. This threatens the success of the eventual reprivatisation of the bank. Regardless of what Osborne thinks he will gain by this, it will be the UK taxpayer that bears the costs.