The Royal Bank of Scotland Group plc
) became the fifth largest in the world in terms of assets, it
was easily deemed Scotland's economic miracle. However, this
brainchild of Sir Fred Goodwin, which broke numerous records on
its way to nearly 26 acquisitions in 7 years (up to 2007), is
still reeling under recessionary pressures.
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When the banking crisis erupted, triggered by the fall of Lehman
Brothers in the U.S., it became obvious that many of the assets
against which Royal Bank of Scotland had borrowed money were
worth only a portion of its previous value. This had prompted the
British government to step in with the biggest bailout in history
for the Royal Bank of Scotland. Five years later, the British
government is still struggling to recover that amount and put the
The Rise and Fall
Royal Bank of Scotland is an eyesore in the British banking
system, a key reminder that all is not well with the sector. The
bank, which is a major threat to the stability and health of the
country's economy, is an example of a fancy deal that has
Once the shining example of Britain's banking system, RBS has
established that market dominance is transient. After being
rescued by the government with £45 billion ($70 billion) in 2008,
the bank is still 81% owned by U.K. taxpayers. Private ownership
looks unlikely and the Bank of England is now forcing the U.K.
Treasury to consider splitting up Royal Bank of Scotland into a
nationalized bank and a commercial banking unit.
Is a Split Possible?
The feasibility of the split is, however, in question. The Royal
Bank of Scotland plodded on for years since the economic crisis
without restructuring its troubled and non-profitable units. This
was partly because of the government's decision in 2008 to take a
passive approach to manage its stakes in the deeply troubled
Lloyds Banking Group plc
Anticipating the banks' quick return to their private ownerships,
the government did not intrude on their strategies. This was in
sharp contrast to the U.S. government, which strategically forced
bailed out giant banks like
Bank of America Corp
) to vend their toxic assets.
Additionally, the nagging Eurozone crisis is slowing down
investments and trade, throwing further challenges to the already
beleaguered financial sector. It also faces stringent regulations
and higher taxes on the face of tougher immigration rules. Even
international regulations like Basel III that will force all
banks to increase capital adequacy, are expected to be
detrimental. In short, banks will be heavily regulated with
little scale for racy profits but will have a much less chance of
Has Government Taken a Stand?
Initially, the British government was commended for its efforts
in dealing with the financial crisis in 2007. While Lloyds is
looking up, the long process of restructuring banks is hurting
the still-weak British economy.
However, after years of a muted approach, the Treasury is
adopting a strapping strategy for The Royal Bank of Scotland. The
British administration has pressed the bank to reduce its
investment bank, shrink its U.S. unit and refocus on the U.K.
The potential split of the bank is likely to be a topic of hot
debate, as it is evident that taxpayers will surely incur huge
losses. Further, it is expected to hit roadblocks with regulatory
authorities. However, we believe that separate banking entities
will be easier to regulate. Then again, with impending
regulations posing threats, we do not foresee much respite in the