Royal Bank of Scotland shuts ‘bad bank’ that took £50bn hit

Royal Bank of Scotland has closed the "bad bank" it created to handle a vast pile of toxic assets after the financial crisis nine years ago, having racked up cumulative losses of more than £50 billion (€56.76 billion) from the unit.

The move, announced in a memo to RBS staff on Thursday, brings the curtain down on one of the biggest financial restructurings – and shrunk by more than two-thirds what was once the biggest balance sheet of any bank in the world.

The job of cleaning up RBS's bad loans was likened to "defusing the time-bomb" by Stephen Hester, the former chief executive, before he departed in 2013.

Capitalisation

In the end, the bad bank’s £50 billion of operating losses included more than £38 billion in loan impairments, disposal losses and writedowns – more than RBS’s current market capitalisation and close to the £45 billion injected by the government to bail it out after the crisis.

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What is left of the unit, into which RBS put more than £300 billion of its most troublesome assets to make its core business appear healthier, has been folded back into the rest of the bank.

The closure is a symbolically important step for RBS as it looks to put its recent woes behind it and return to profitability next year. The government announced plans in last week’s budget to start selling its 71 per cent stake in the lender in the next 16 months.

This week, the bank scraped through the Bank of England’s annual stress tests without needing to raise capital, despite having fallen below its minimum levels in the exercise.

Ross McEwan, who replaced Mr Hester in 2013, described shutting the bad bank as “a key moment for RBS”. He added: “It has taken nearly 10 years to undo the consequences of the global ambitions pursued by RBS in the run-up to the crisis.”

RBS was among the first European banks to set up a unit to house its toxic assets after the financial crisis. But the challenges it faced as it retreated to its core UK market are now increasingly commonplace: many of its large rivals have followed suit.

Unravelling the errors of the pre-crisis era at RBS has involved selling a bizarre array of assets, ranging from a hospital in Australia to the largest cosmetic surgery business in Asia.

Balance

The bank has shrunk its balance sheet to £751 billion, down from £2.4 trillion at the peak in 2008 – more than the UK’s gross domestic product – while withdrawing from 34 of 50 countries and shedding more than two-thirds of its 225,000 staff.

The assets left in the bad bank had a risk-adjusted value of £23.1 billion in September. They included a stake in Saudi Arabia's Alawwal Bank, which is in talks to merge with HSBC-affiliate Saudi British Bank, a deal to dilute RBS's stake and slash its capital impact.

The other £16 billion of risk-weighted assets that have been folded back into the group include the part of its Greek shipping business that it could not sell, some corporate loans and a portfolio of long-dated complex derivatives that are difficult to unwind.

Some of the remaining 80 staff in the bad bank unit – which employed 19,000 people at its peak – have been redeployed by RBS while others have left the bank.

Mark Bailie, who ran the bad bank for many years before being promoted to chief operating officer last year, said: "I would like to thank everyone who has worked so hard, first of all to save this bank and then to rebuild its capital and reshape it in line with our strategy."

– Copyright The Financial Times Limited 2017