Five years on, RBS still fails to function as a bank should

Of £634 million in quarterly losses, RBS has set aside another £250 million to pay off those taken for a ride over payment protection insurance. Settling up for that utterly dishonest attempt to part customers from their money has thus far cost the bank £2.65 billion.

Meanwhile, after years of promises and protestations, a report into lending practices at RBS by Sir Andrew Large, formerly of the Bank of England, is utterly damning. Three out of four applications for loans from small and medium-sized businesses refused; too much "aggression" towards customers in difficulties; and a failure by RBS to hit even its own modest targets.

These details are mentioned for two reasons. One is that the banking industry's leading figures have been raised on the idea of moral hazard, the idea that if irresponsibility is tolerated things inevitably go from bad to worse. The second reason is that George Osborne, steward of "our" 81% stake, bought for £46 billion, has surveyed his RBS kingdom and declared that it has embarked on a "new direction".

The Chancellor made a little less noise yesterday when admitting that the bank will not be returned to private hands before the next General Election. The Treasury tune has changed since the spring. Back then, it was full steam ahead, all flags flying, for a nice windfall before voters went to the polls. Now even Mr Osborne admits that RBS is in no fit state to fulfil his dream.

Five years have passed since the Labour Government took the first steps towards nationalisation. The residue of Fred Goodwin's hubris and the near-collapse of banking internationally left vast stains on the reputation and balance sheet of what had recently been the world's biggest company. But five years on RBS remains an under-capitalised bank labouring under £38 billion in toxic assets, one with a persistent talent for attracting scandal and an inability to do its basic job.

Its condition is emblematic of the industry Mr Osborne promised to reform and repair. The £38 billion in rotten loans at RBS ("assets" is a peculiar euphemism) could be explained away as a problem much diminished, a vast amount but little more than one-sixth of the stinking pile inherited by Stephen Hester when he took over as chief executive in 2009. The abject failure identified by Sir Andrew Large is another matter. Some 14,000 jobs have gone from the RBS investment banking arm to add to tens of thousands culled from ordinary employees who knew nothing about scandals or bonuses. The ambition to create from the wreckage of the casino a retail bank capable of "sustaining the economic recovery", in the Chancellor's words, as part of "a banking system that works for Britain" has been proclaimed repeatedly.

Instead, there is a bank failing to lend, one that has sometimes been downright nasty towards customers who fail to meet the criteria of inept managers. Any talk of new directions or capital adequacy, of releasing £12 billion in capital within two years - a likely story - by ring-fencing that £38 billion, rings hollow beside the basic fact. Five years on, RBS is still failing to function as a bank is supposed to function.

Mr Osborne declines, furthermore, to create a "bad bank" to house those toxic assets. The advice from Rothschild, in essence, is that the exercise would involve more bother and cost (£4.5 billion in loans written off next year) than it would be worth. But by creating a "capital resolution" division to contain the £38 billion within RBS, the Chancellor and Ross McEwan, the latest chief executive, are simply spreading the pain and postponing a return to the private sector.

Since nothing whatever has been learned from the crisis of 2008-2009, the idea that RBS could remain in public hands is not discussed. No help has been forthcoming for ordinary people, employees and the general public, who risked savings and pension hopes on Goodwin's £12 billion rights issue in April 2008. The taxpayer's chances of recovering that £46 billion any time soon meanwhile look slim. Judging by yesterday's share price, we would be lucky to get two-thirds of the money.

So we wind up with the worst of both worlds. On the one hand, there is a nationalised bank that continues to fail its small business clients; on the other, there is an RBS that could only be returned to the private sector at a staggering loss. The legacy of past malpractice and sheer stupidity hangs heavy, of that there is no doubt: those toxic assets are proof enough. Banking "culture" remains a practical and moral issue, as persistent scandals demonstrate. But after five years of remedial work, three of them on Mr Osborne's watch, RBS is still a basket case. It is likely to remain in real difficulties for several years to come. This is not what the chancellor promised.

In reality, he has looked at those £38 billion in bad loans and said "No, thanks". Had a bad bank been created, those would have been 100% state-owned. Osborne does not possess the kind of Treasury balance sheet in which such things can be hidden easily. That being the case, he has refused to give RBS the practical aid it needs to rebuild its capital in short order, or to help those small and medium-sized businesses.

Nor will the Chancellor be helping the bank to build up the capital ratio that would provide a cushion in the next crisis. Instead, Mr McEwan is in a hurry to dispose of Citizens, the RBS banking property in the US, and somehow find a way to dump most of the toxic assets within two years. If this is Mr Osborne's road to recovery it will see RBS post another big loss by the time 2013 is over. No effort has been made to hide the fact.

The upshot is that there will no incentive to improve the bank's lending record to smaller businesses and households. That was, as it remains, politically-induced rhetoric. Yet there is no guarantee, either, that the free marketeers' promise of privatisation, with the public purse reimbursed, is anywhere near being kept. If anything, the drive to end half-hearted state ownership continues, to no one's benefit. The Government could stop being half-hearted, of course. It could end the hopeless compromise and embrace the idea of a national bank, a publicly-owned utility with the state's guarantee. Predictably, such an institution would "distort the market". Given what we have seen of the market in scandal after scandal since 2008, you might question whether customers or taxpayers would have many objections.

This willl never happen while Mr Osborne has breath. Given three years of his stewardship of RBS, however, he might also want to save his warm breath before telling us again of new directions for a ruined bank.