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Royal Bank of Scotland, Northern Rock and Lloyds Banking Group - Treasury Contents

Examination of Witness (Question Numbers 60-79)


12 JANUARY 2010

  Q60  John Mann: You are not expecting then any issues with your business plan in this current year, regardless of changes to the tax system in terms of the skill pool that you have available to you?

  Mr Hester: I think that RBS has a number of pressing, important and difficult issues regarding the skill pool that is available to us because people feel worried about working for RBS and about being criticised and about having a more difficult job and about being judged by different rules than others, so it is probably my single greatest business problem, but I think that is a lot to do with RBS as opposed to London versus non-London, if I can put it like that. Issues on London versus non-London add to that point but are not my biggest worry personally.

  Q61  John Mann: Do you recognise other fears, that by the number of redundancies that you have created in the bank, in fact you are losing key levels of expertise that will be required in future years should the bank resurrect itself fully?

  Mr Hester: Obviously, there are two circumstances where people leave us: one where we wish they would not and the other where we have agreed with them that they should. In the first of those, yes, we are losing talent that I wish we were not, and it means we need to go and hire it back and it means in the meantime we take some risks with our profits and recovery that I would like not to. So I greatly regret circumstances where we lose people we do not want to lose. In the case of redundancies, however, inevitably, probably the single most unpleasant bit of my job, perhaps beyond appearing in front of you, is the people decisions that I have to make. I have to balance my duty to all our shareholders and all the taxpayers of this country to restore the bank to profitability, and in so doing cut our costs and make us efficient, with the very real human side to that, which I myself have experienced personally in the past.

  Q62  John Mann: In terms of the talent pool, you must be looking forward as well as dealing with the immediacy or you must have people doing that. In terms of maximising the talent pool available to you, what is your strategy? Where are you looking for the talent pool for two, three, four years' time that will take the bank forward?

  Mr Hester: One of the things that I believe very strongly in is graduate recruitment, bringing in young people and developing them for future talent, and one of the things that we have tried not to do is to curtail what I might call that pump-priming activity in our time of difficulty. So even though we are making severe cost cuts at the moment, we are continuing to recruit young people and train them, and I think we must because that is our lifeblood for the future. Now, I will be candid with you and say that, with all the other priorities we have, are we doing as good a job in that area as we should? Probably not, and I would seek to do a better job but we have certainly very consciously not cut back on that to the extent that some other people are reported to have done.

  Q63  John Mann: Finally then, when some people are suggesting impending catastrophe for the banking world by possible changes in the taxation system, on personal tax, that sounds like that is not a scenario that you would regard as relevant to the situation with your bank in the current year.

  Mr Hester: The only sense in which I would say this is that I believe that the policies and economic management of the Seventies, with all the tax rates that were involved and all the attitudes towards enterprise and so on, was not conducive to a successful economy, and I think that the political and economic management of the economy in the Eighties, Nineties and particularly in early 2000s improved in a number of areas, and tax rates was one of those areas where enterprise was more encouraged and rewarded in a whole series of ways, and it does seem to me that the future success of our economy does require people who create wealth to be encouraged to do that, individually and collectively. It also then allows some redistribution of that wealth through government, which I also believe in, and these are things that need to be balanced. I think it is very important that we do not throw away the economic flexibility gained over the last 25 years in a regression to the Seventies, and I hope we do not.

  Q64  Mr Fallon: Mr Hester, how many of the companies that you have lent to does RBS now effectively own?

  Mr Hester: I cannot really give you a number, I am afraid, first of all because I would have to define the "effective" and I also just simply do not know it. We certainly have a very important interest in a number of troubled companies to whom we have lent in terms of the control that we have over their fate.

  Q65  Mr Fallon: You must know how many you effectively own? Is it 500?

  Mr Hester: I am sorry. I cannot give you a number. I can try to write to you with some statistic. I am not sure how helpful it will be because of the difficulty of defining the term, but we can try and help you in that sense.

  Q66  Mr Fallon: If we take ownership as more than 50%, you must know how many companies you own.

  Mr Hester: I am sorry to say I do not have a number of you.

  Q67  Mr Fallon: Do you think it is 500? Do you think it is 1,000?

  Mr Hester: I would think it would be more than that but I do not know.

  Q68  Mr Fallon: You own more than 1,000 companies?

  Mr Hester: Yes, but let me write to you. I do not know. It would be stupid for me to give you a number that I am plucking out of the air.[2]

  Q69 Mr Fallon: Should you not know how many of the companies you have lent to are now effectively owned by RBS?

  Mr Hester: I am sorry. My mind is limited and there are only a certain number of things I keep in it and that one is one I do not.

  Q70  Mr Fallon: How are those businesses that you do effectively own going to be returned to full private ownership at a time when interest rates are going to rise?

  Mr Hester: One of the things—I hesitate to say we are proud of anything because I think pride is a luxury we probably do not deserve, but one of the things we I think are acknowledged in the industry as having is a fairly advanced and well experienced group—we call it our Global Restructuring Group—of professionals whose job it is to help rescue companies that have got into trouble to whom we have lent and allow them to be reset on a firm footing, which both is good for the company and ultimately a better way of us getting our money back, or at least some of it. So we have pushing 1,000 people now whose job is just to do that, and I think very many actually pleasing and successful examples of case histories where that has happened. One of the things I would be very pleased, either to members of the Committee in their capacity as members of the Committee or to any of you personally, would be to host you at the bank and to hear some of these stories and to give you the tangible examples of companies we have helped and how we go about it, because it is a very important bit of how we can both socially and commercially usefully deal with the fall-out of difficult economic conditions.

  Q71  Mr Fallon: Could you just clarify the policy for me? How long do you want to own commercial businesses?

  Mr Hester: Our starting point is that we do not want to own them at all but sometimes it is better for a company for us to swap some or all of our loans for equity. It allows the company more freedom to develop and therefore to attain an ownership position than just keeping loans that bleed the company way through interest rate. Each situation is different. Our goal is not to own companies and, where we have ownership positions, to get out of them, consistent, obviously, with protecting our shareholders in terms of getting value for those shares. Sometimes it might be a matter of days; other times it might be a matter of years, depending on the recovery path of the company.

  Q72  Mr Fallon: So you will let us have some figures. Since your appointment how much have you rebuilt the investment banking business? What has been the increase?

  Mr Hester: In one sense we have done the opposite. I would say the epicentre of the restructuring of the bank, the area that needed the biggest surgery, was the investment bank. We have approximately halved the size of the investment bank, whether you measure it by its balance sheet or the capital in it, with many, many thousands of employees going, many business lines and countries shut down or pulled out of, and that process is ongoing. So by far the biggest shrinkage has been in the investment bank and that notwithstanding, the investment bank is a very important and very profitable part of what we do but it is much smaller and, I believe, much safer than it was a year ago.

  Q73  Mr Fallon: Yes, but are you trying to shrink it or are you trying to grow it?

  Mr Hester: The elements of shrinkage have all been announced, and over two-thirds of them have been implemented. There are still some to do but it is all recorded and every quarter we report on how we are doing on that. The remaining areas of the investment bank, what we would call the core areas, are ones that we are trying to defend and potentially grow—it depends on the specifics of the opportunity in different cases.

  Q74  Mr Fallon: I just want to be clear what the policy is. You are trying to increase the turnover again of the core investment banking business. Is that right?

  Mr Hester: We would like what I would call our core investment bank to be successful.

  Q75  Mr Fallon: Would you like it to grow in size?

  Mr Hester: We would like it to be successful.

  Q76  Mr Fallon: I am asking whether you want it to be bigger.

  Mr Hester: I do not believe that size is the correct goal. Size may be an outcome but I do not see it as a goal. I see our goal being about customer service, about safety of the bank and about shareholder value. You will find nowhere in our strategy documents a size ambition for itself. Size is an outcome of those things, not a goal.

  Q77  Mr Fallon: Do you want the core investment banking business to be more profitable than it is?

  Mr Hester: Yes.

  Q78  Mr Fallon: So you are trying to grow the business?

  Mr Hester: We would like it to be more profitable. In some instances that means doing the same business more cheaply; in other instances it means doing more business. I believe that the balance sheet and the capital resources are the ones that we would least like to grow, so we would like to be more effective, more productive, more than the pursuit of size for its own sake. I do believe in respect of all of our core businesses that we need to be in the top group in the specific markets that we pick in order to successfully compete and those areas where we are not by and large we have exited or are exiting.

  Q79  Mr Fallon: What is your view of the case for splitting off the investment function of banks from the credit and payment systems, so that next time you mess up the investment function we do not have to bail you out again?

  Mr Hester: I think that the diversity of the world's financial services system allows many different models and I do not think that one size fits all. I think one thing is undisputable, and that is that there is no evidence deriving from the financial crisis to support a renewed Glass-Steagall. When you look at the banks that have failed, the preponderance of banks that have failed were simple banks, either simple investment banks—maybe "simple" is the wrong word; were narrow banks, either narrow investment banks like Lehman Brothers or Bear Stearns, or narrow mortgage banks like Bradford & Bingley and Northern Rock, or narrow commercial banks like in the US Wachovia and Washington Mutual. So in fact the least number of failures were what I would call universal banks that combine them. In fact, RBS did not fail but RBS would have been the exception to that rule. So if you are seeking to argue for Glass-Steagall, you cannot argue it on the evidence of the financial crisis. You have to use a different basis. My own view is that there is an enormous public policy/economic management/bank regulatory issue around how to allow banks to fail but I do not think that is the same as prescribing what business activities they should undertake.

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