Scott Macnab: Scotland can't afford to let rogue bankers strike again
Edinburgh’s status as the UK’s key financial hub outside London was cemented earlier this year with the creation of a new “super power” investment house to dwarf its European rivals. The merger of Standard Life and Aberdeen Asset management may have suffered a rocky start with £10 billion of withdrawals.
But the new behemoth, Standard Life Aberdeen, becomes the second biggest fund manager in Europe with well in excess of £650 bn under management at bases in 50 cities worldwide.
It again underlines the pivotal role financial services play in the economic profile and everyday working life of Scotland’s capital.
But as former Prime Minister Gordon Brown warns the prospect of another banking crash is all too real, how would the industry north of the border cope with a second crash inside a decade? And should we have been ready to jail the guilty bankers who brought so many of our financial giants to their knees?
Spain and Ireland have both recently jailed bankers for their role in the crash of the decade ago. Iceland, with its population of just 500,000 and a disproportionately huge banking sector, famously sent 29 senior executives to prison at the time of the crash.
The Nordic island’s current Prime Minister Bjarni Benediktsson recently said his own country’s actions had helped to “heal” the effects of the crisis and suggested a “frustration” that abuses were not at least investigated in the UK. About £500bn of taxpayers cash was needed to bail out most of the UK banking sector and given this Benediktsson said he was “surprised by the fact that little was done” in countries like the UK to prosecute those who broke the law. It would certainly have helped satisfy public anger.
But more importantly such a move would provide a powerful deterrent against similar risk-laden behaviour being repeated in the future which could bring about another crash. For Scotland simply couldn’t afford it.
As the oil industry continues to wane, firms like RBS, Lloyds, Clydesdale and Tesco Bank will become an increasingly crucial driver of economic growth in the country.
Standard Life Aberdeen may not be a bank, but along with fellow investment giants like Scottish Widows and Baillie Gifford, lies at the heart of the financial services industry.
This sector currently employes almost 100,000 people directly and the same again indirectly – already way more than the oil industry.
It is responsible for more than 8 per cent of Scotland’s GDP, generating about £8bn for the economy.
Perhaps what is most startling about the claims made by Mr Brown in his forthcoming memoirs, My Life, Our Times, is that nothing has changed at the banks ten years after the crash. The bonuses paid out to top executives, which prompted casino-style approach to handling depositors cash shows no signed of abating.
The EU had sought to introduce a cap on bonuses at a maximum of 200 per cent of salaries, but banks were able to “circumvent” this by simply introducing a new category of pay called “fixed term monthly allowances” or just by raising salaries.
A typical senior banker in the UK earns £1.3 million.
Britain also has three-quarters – more than 4,000 – of Europe’s €1m bankers, a figure that has risen 50 per cent since the crisis.
Even at RBS the number of bank employees earning more than €1mhas barely changed – 121 down from 131. This is all the more remarkable given the bank is still essentially state-owned.
The Scottish Government’s annual breakdown of the country’s public sector workforce actually includes RBS staff in the headcount.
But it has wracked up steady losses over the past decade which now total about £60bn.
The good news is it looks set to become profitable again this year - the bad news is a hefty US Department of Justice fine over mortgage bond mis-selling may derail things again and further delay the long-anticipated flotation and return of the bank to private hands.
Whether the UK Treasury is re-imbursed for the billions is splashed out to save RBS remains to be seen.
And it comes at a time of increasing uncertainty for the sector particularly over Brexit.
The Bank of England has warned that 75,000 jobs in the industry across the UK are at risk from EU departure, with finance giants having warned MSPs recently that they are drawing up plans to establish European bases.
It’s hardly a surprise.
Why should the Europeans continue to accept London as the financial capital of the continent in a post-Brexit landscape. The French have already hinted that London could be blocked from the highly lucrative trade in clearing euro-denominated derivatives after Brexit, as they seek to establish Paris as Europe’s new money hub.
But the more potent threat to the UK’s financial services primacy comes from Frankfurt. Goldman Sachs chief executive Lloyd Blankein sparked a frenzy of speculation recently when he tweeted about “great meetings” the German city, adding ominously that he will be “spending a lot more time there.”
As well as being the financial capital of Europe’s biggest economy, Frankfurt is also home of the European Central Bank.
The prospect of a second referendum on Scottish independence presents further uncertainty for Scotland’s finance industry.
The SNP looks increasingly likely to advocate a new stand-alone Scottish currency as the bedrock of a future Yes campaign which would be the nightmare scenario for these financial institutions and guarantee that many would chose to register south of the border. RBS chief Ross McEwan has already indicated as much after a Yes vote.
The truth is these institutions are now multi-national corporations.
The prospect of jail may deter the vagaries of rogue bankers in some jurisdictions.
But the longer term solution to curbing the excesses of these trans-national conglomerates surely lies in Brown’s vision of revamped international institutions to create common global financial standards and prevent a repeat of the shocking lending and trading practices which brought about the last meltdown.
As things stand, another crash is far from inevitable.