Royal Bank of Scotland — House of Commons, 2015-11-05
Topic: Domestic Commerce
Steven John Baker (Conservative, Centre-right): As I said earlier, we compared the asset protection scheme’s accounts with those of RBS and found a £20 billion difference in capital. When I write to my hon. Friend with the details from the IMF, I will introduce him to the people who did that work. I would be glad to sit down with him and my advisers and see what he thinks, because I recognise and respect his vast experience. I am, of course, only a humble engineer who sat in banks asking people how the system worked and found that they often could not tell me These concerns are not ones that I have made up. I have in my hand a letter from the Local Authority Pension Fund Forum that explains to our commissioner at the European Union in considerable detail over eight pages what is wrong with the IFRS. I would be pleased to share that with Members who are interested I am extremely uncomfortable with the idea that we understand the true and fair position of RBS, or indeed any other banks, because of the imposition of the IFRS. Particularly in relation to RBS, that has meaningful consequences when it comes to thinking about selling the shares. There are also consequences that we should consider when any consideration is given to paying out dividends Secondly, I want to raise Professor Kevin Dowd’s extended criticisms of the stress tests. He has made the point to me that under the 2014 stress tests, RBS had a projected post-stress, post-management action ratio of capital to risk-weighted assets of 5.2%. That was sufficiently poor that the bank was required to take further action on its capital position. Of course, it now wants to hand out dividends. That seems to both of us to make no sense. He continued: "This 5.2% ratio compares to the 4.5% hurdle the Bank used, which is actually less than the 7% imposed on UK banks last year, and much less than the 8.5% to 11% minimum that will be imposed when Basel III is fully implemented in 2019." The range arises because of the counter-cyclical capital buffer. That is rather bizarre because it appears that RBS did not meet the Bank of England’s minimum requirements in the stress tests I am afraid that it gets worse. Because market events do not follow a normal distribution, there are severe problems with the risk-weighted assets measure that perhaps even render it useless. Therefore, the only measure that really makes sense is the leverage ratio, which is the ratio of capital to total assets, with none of the risk weighting. Under Basel last year, the absolute minimum leverage ratio was 3% and the Bank of England expected UK banks to meet that minimum. That 3% minimum was low. Some of my advisers suggest that a minimum of 15% is necessary, and possibly even double that for the bigger banks. That would be a radical departure. What did RBS achieve under the stress tests? It achieved 2.3% I am grateful for the work of Kevin Dowd, Gordon Kerr and John Butler at Cobden Partners on the IFRS and the stress tests. The problems that they have put in front of us are potentially extremely severe. I encourage the Government to meet my colleagues, to look at this matter again in great detail and to understand what has happened with this accounting, so that they can see what it means for our ability to see the true position of banks and how it incentivises structures that we subsequently find, as was pointed out earlier, are of no social value—structures that often serve to deceive and to create an impression of capital where there is none It is highly unlikely that RBS is in the state it appears to be in, and I agree with those who have called for diversity in ownership models. The challenges of providing those diverse banks out of RBS in its current condition are probably insurmountable, and I would welcome Government policy action to encourage mutuals and co-operatives. Above all, I encourage the Government to take all possible steps to establish the true position of RBS and the entire banking system, by comprehensively investigating the flaws in IFRS that have been well set out.