ROYAL Bank of Scotland has undergone a greater transformation than any other major UK lender since the financial crisis, Bank of England financial stability czar Alex Brazier has said.
Mr Brazier underlined the scale of the changes completed at the Edinburgh-based bank since it was left requiring a £45 billion taxpayer bail out in 2008 during a visit to the city.
“When you look back over the past 10 years we’ve completely transformed how safe the banking system in particular, but the financial system in general, is in the UK and in Scotland,” said Mr Brazier, who is executive director for financial stability strategy and risk at the Bank of England.
He added: “Royal Bank of Scotland perhaps more than any other bank in the UK has transformed since the financial crisis.”
A key player in the official effort to ensure the UK avoids a repeat of the problems seen in 2008, Mr Brazier reckons RBS provides a clear example of the impact of the reform drive regulators initiated.
This was intended to ensure that banks that were important to the system became safer and simpler.
The work has involved requiring banks to have capital ratios that are three times stronger than they were in the run up to the crisis. Lenders have been encouraged to strip out many of the tangled webs of transactions that were so dangerous in the financial crisis.
Royal Bank came close to collapse after a rapid expansion drive into new areas and complex markets under Fred Goodwin left the sprawling organisation with a balance sheet stuffed with many assets that proved to be worth less than book value.
After refocusing on the UK, the bank has incurred massive losses amid efforts to deal with the legacy of the expansion drive. The Government appears to have little prospect of being able to sell its 71 per cent stake at a profit any time soon.
However, Mr Brazier said RBS has made significant progress this year under chief executive Ross McEwan with efforts to strengthen its capital position, helped by offloading non core assets.
He noted RBS had passed the latest stress test designed by the Bank to see if the seven systemically important lenders could cope with a severe economic downturn, based on the position at the end of the third quarter. RBS would have failed the test based on its position at December 31.
“If we were to run the stress test today we’re very confident that RBS would be able to deal with that very severe economic scenario comfortably within the capital buffers that it has,” said Mr Brazier.
None of the seven groups concerned needed to raise capital as a result of the latest stress test, for the first time since the Bank launched the exercise in 2014.
Asked if he was concerned that RBS and Bank of Scotland owner Lloyds Banking Group had such a big exposure to the UK housing market and consumer borrowing, Mr Brazier said he was confident the capital buffers they had been required to put in place could absorb losses that might arise.
But Mr Brazier noted advances in financial technology could pose fresh challenges for the major banks.
Fintech will allow the unbundling of services offered by incumbents, with new players handling things like deposit-taking and payments.
“That’s potentially very good for consumers because it opens up all sorts of possibilities for competition and it’s potentially very good for financial stability because you haven’t got one institution like Royal Bank in 2008 effectively making loans in the US and being responsible for a large share of the payments system here in the UK,” said Mr Brazier.
Noting exciting Fintech work is being done in Scotland, he added: “We’ve been thinking quite hard about what risk could arise particularly to the incumbent banks who would face some threat to their business models they would need to brace for.”
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