EDINBURGH will never recover from the failure of its two largest banks at the height of the banking crisis in 2008, according to a former Scottish Government economic adviser.

Professor John Kay, who was a member of the Council of Economic Advisers until 2011, said he would regard the permanent loss of the capital city's leading position in the banking industry as a 'tragedy.'

The Royal Bank of Scotland and Halifax Bank of Scotland narrowly avoided bankruptcy through a £500 billion taxpayer-funded bailout package in October 2008 and have since shed at least 90,000 employees worldwide. The companies' total number of employees in Scotland has fallen by some 10,000 as the institutions have shifted their centre of gravity to London.

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Prof Kay, who also chaired a UK Government review of the equity markets in 2012 and is a visiting professor at the London School of Economics said: “We’re never going to recover the position that we had for centuries in banking – and that’s a tragedy.”

Speaking to The Herald at University of Edinburgh’s Business School, Prof Kay added that he felt it would to "take another crisis" before the UK’s banking sector is properly reformed.

He believes key post crisis reforms have been weakened as a result of the “power of the investment banking lobby in Westminster.”

The RBS executive team, is today led by New Zealand-born chief executive Ross McEwan from 280 Bishopsgate in the City of London and HBOS’s surviving brands are run by Portuguese born banker Antonio Horta Osorio from Lloyds Banking Group’s head office in the City of London.

“I would concur with John Kay’s view,” said Rob MacGregor, National Officer for the finance sector at the trade union Unite.

“The damage to the banking industry’s reputation is unlikely ever be repaired – and it certainly won’t be repaired won’t under current generation of bankers. The crisis and the mis-selling scandals that have surfaced over the past seven years have fundamentally ruptured the relationship that consumers once had with banks. I’m afraid that the trust that people once had in banks has gone forever.”

The collapse of RBS and HBOS has had serious knock on effects for the professional services sector in Scotland. At least eight of Scotland’s most prominent law firms have either collapsed or merged since the crisis. Legal sources blame a decline in banking-related work caused by the banks troubles.

The fact the banks are increasingly controlled from London, and a hiatus in the commercial property market that was linked to the banks’ collapse.

Law firms McClure Naismith, Tods Murray, Ross Harper and Semple Fraser have gone bust since 2009.

Legal names that have vanished through mergers with larger English firms include Biggart Baillie, McGrigors, Dundas & Wilson and Simpson & Marwick.

Prof Kay acknowledged that Scotland was doing better in areas of financial services beyond banking, notably asset management. He added: "The fact Edinburgh asset management wasn't much into private equity and hedge funds before 2008 was, if anything, a good thing."

But Owen Kelly, chief executive of industry organisation Scottish Financial Enterprise, said: “Scotland’s diversity as a financial centre – we’re not just providing banking but also asset management, pensions, insurance, asset servicing all kinds of other services – has given us resilience. In terms of job numbers, we are roughly where we were in 2008 – a much better outcome that some were expecting.

“People thought a lot more jobs would go, with some estimating as many as 40,000 job losses. We’ve seen the industry reconfigure for new market conditions.”

Mr Kelly pointed to successes such as Tesco Bank, which was founded as a standalone company in December 2008 and has grown Scottish staff to 3000 people.

He also pointed to financial planning and investment management firm BlackRock's decision to double the number of its staff in Edinburgh to 550 people over the past three years.

The financial services sector employed 100,000 people in Scotland before the crisis. That dipped to 84,000 in 2009, but has since climbed to 96,000.