LEX Everyone with an investment bank should put “square brackets” around it, according to Stephen Hester, chief executive of Royal Bank of Scotland. “Separability” is the new buzzword for UK banking. It is not hard to see why. The Conservative party is proposing to return banking supervision to the Bank of England if it gains power. With Mervyn King openly espousing the legal separation of narrow retail banks from the casinos – a dogma that the existing regulator, the Financial Services Authority, deems unworkable – regulatory risk is rampant.
Regulators have given themselves until the end of next year to provide new capital and liquidity requirements. The direction of travel, however, has long been clear. Already, some universal banks are reorganising themselves to make it easier for them to draw up credible “living wills”. These would allow them to retain their investment banking arms, provided they could in extremis be discarded, like lizards’ tails, without contaminating ring-fenced and taxpayer-backed retail deposits. Barclays this week announced plans to disentangle its retail bank from its commercial business. The latter will now sit alongside Barclays Capital, its investment bank, and Barclays Wealth. RBS may have to do something similar.
Structural issues aside, Mr Hester is making progress with the recovery plan. Net interest margins are stabilising at 175 basis points, ahead of the 160bp guidance given in August. The group cost/income ratio fell to 59 per cent, down from 66 per cent in the second quarter. Most importantly, impairments are levelling off, with £3.3bn registered in the quarter, down 30 per cent on the previous quarter.
Still, RBS needs the asset protection and new capital it will get courtesy of the Treasury. Its core tier one ratio, which slipped to 5.5 per cent from 6.4 per cent in June, rises to 11.1 per cent with the government’s latest financial backing. With any recovery slow at best, it will need it.
