Examination of Witness (Question Numbers
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
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
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
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
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.
Q69 Mr Fallon: Should you not know how
many of the companies you have lent to are now effectively owned
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 thingsI
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 groupwe call it our Global
Restructuring Groupof 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 growit
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
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
banksmaybe "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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