First, what RBS did was wrong, as leaks to the BBC and Buzzfeed, and the justice campaign for its former SME customers, show. The latest round of revelations follow an older campaign, in which former RBS customers swarmed the FCA annual meeting, plus investigations by MPs and the law firm Clifford Chance.
RBS appears to have used virtually any excuse to push clients' loans into restructuring, to charge substantial exit fees, to restructure loans on to higher interest rates and to seize loan collateral. Sometimes it apparently sold collateral or SME assets on to West Register, its property management and ownership division.
There are seemingly yet more grim disclosures about the bank’s behaviour — for example, executives told the UK parliament that the turnaround unit, the global restructuring group, was not a profit centre, yet some of the leaked documents seem to show that the division recorded profits north of £1bn.
Without a full response from the firm, it’s hard to be sure how revealing the the leaks really are, but they certainly look bad. In particular, selling assets from foreclosure to the bank’s own distressed fund would be a clear conflict of interest.
The ethical problem is that the bank is using two different prices to assess collateral — a low price to force borrowers into covenant, and a high price for its own expectations about where it could subsequently sell the same collateral.
Essentially RBS was one side of a trade, and provided all the marks for it, while the other side was a small business with nothing like the same market power and little ability simply to replace the firm with another bank during the depths of the credit crunch.
Forcing borrowers into fee-intensive paths of loan restructuring on the basis of RBS’s own marks also seems terrible — again, the bank appears to have acted as judge, jury and executioner. It is telling that few of the other UK banks, all of which found themselves under pressure in 2008, have attracted anything like the same level of opprobrium.
But large parts of the RBS restructuring group appear to have been doing exactly what the Italian banks are being asked to do.
Euphemisms like “balance sheet clean-up” or “getting on and dealing with non-performing loans” mean, in plain English, activities like marking down collateral to a conservative assumption, starting insolvency proceedings, refusing to roll loans, seizing assets and closing out hedges. Clients with low interest rate loans might find their solvency reassessed radically and loan margins increased.
These activities can put firms out of business and see people turfed out of their homes.
Businesses that are “viable”, in the sense that they turn a profit when their debt financing is long-term and low cost, will find they do not make money when their debt cost doubles. Mortgage holders struggling to cover their payments may have to hand the keys back if they cannot sell.
Governing this process is difficult, because the pain is so intense for the borrowers involved, and because those who collect on debt are not always motivated to act ethically. That doesn’t excuse firms from upholding standards and acting with integrity — indeed, integrity is far more important when seizing an Irish pensioner’s home than when underwriting an investment grade bond deal to be sold to major institutions.
System-wide, this process creates a virtuous feedback loop.
Failing fast, writing off debt and personal bankruptcies set the stage for the re-expansion of credit. Distressed borrowers find they can refinance in the market, asset prices rise, collateral becomes more valuable and once non-performing loans perform — boosting bank capital and creating more room to write off other assets.
But for the people involved, such a scenario can be a disaster and politicians, where this happens, are rightly sensitive to their stories. That’s the real story behind Italy’s ‘failure’ to solve its NPL problem, not a sort of Mediterranean insouciance or the (admittedly shocking) Italian court system.
Underplaying the pain involved in restructuring NPLs might be tempting — a cabal of international financiers and central bankers conspiring to hurt ordinary Italians, Spanish, Irish or Portuguese is not a good look for the industry. But it won't help confront the hard choices involved.