The UK Treasury has announced the complete sale of its remaining shares in NatWest Group, marking the bank’s return to full private ownership nearly two decades after a taxpayer bailout during the 2008 financial crisis.
This concludes a significant chapter in British banking history.
In the early hours of October 13th, 2008, Chancellor Alistair Darling finalized the details of the largest government intervention in the private sector since World War II, a bailout costing the taxpayer over the entire annual defense budget.
The government ultimately invested £45bn (approximately £73bn today), acquiring an 84% stake in the Royal Bank of Scotland (RBS), now part of NatWest Group. At the time, RBS’s balance sheet exceeded the size of the UK economy; its collapse would have had devastating consequences.
The protracted 17-year sale raises questions. Given the emergence of new risks—including state-sponsored cyberattacks—how vulnerable are UK banks today? Does the “too big to fail” label of 2008 still apply, and would another crisis necessitate another taxpayer bailout?
NatWest Group Chairman Rick Haythornthwaite expressed gratitude for the 2008 intervention, emphasizing the bank’s deep appreciation for the taxpayer’s role in protecting businesses, homeowners, and savers.
Significant changes have occurred since 2008. RBS’s outstanding loans, employee count, and the unrecovered £10bn of taxpayer funds all reflect a transformed landscape.
While the government’s expenditure appears as a poor investment, Baroness Shriti Vadera, a former government advisor, clarifies that it was a rescue, not an investment. The priority was maintaining economic stability by ensuring continued lending and essential banking services.
The potential consequences of a banking collapse were dire, prompting discussions of extraordinary measures, as evidenced by former Prime Minister Gordon Brown’s account of potential societal unrest.
RBS wasn’t alone in facing collapse. A global crisis triggered by the US mortgage market’s instability led to a freeze in interbank lending.
Northern Rock’s 2007 reliance on borrowed funds highlighted the vulnerability of the system, ultimately resulting in its nationalization. Bank of England Governor Andrew Bailey stressed that nationalizing RBS prevented incalculable economic damage.
The crisis affected global banking, with prominent failures in the US and the UK. For the UK, however, RBS presented the most significant systemic risk due to its size and interconnectedness within the national and international financial systems.
RBS’s aggressive expansion under Fred Goodwin, later stripped of his knighthood, contributed to the crisis. The ensuing years saw numerous complaints regarding RBS’s handling of distressed businesses.
The delayed sale of RBS shares, resulting in a £10bn loss, is attributed to the complexity of the situation, including legal issues in the US and the politically sensitive nature of crystallizing losses during austerity measures.
While the government profited from its Lloyds Banking Group investment, RBS presented a far more complex and challenging case. Its substantial losses and legal battles deterred early divestment.
Many believe the lengthy divestment process hindered private investment. Baroness Vadera suggests a shorter timeline could have been more effective.
Haythornthwaite views the share sale as a symbolic moment for the bank and the nation, signifying a move towards a more secure future.
However, the question remains: have the lessons of the past truly been learned?
Bailey believes the banking system is more resilient, citing alternative rescue methods that minimize the need for taxpayer funds. Rigorous stress tests and increased capital reserves contribute to this improved stability.
Sir Philip Augar concurs, emphasizing the reduced leverage and increased capital cushions within the banking sector, although he acknowledges the possibility of future collapses.
New risks, however, exist. Cyberattacks pose a significant threat to the smooth operation of banking systems, highlighting vulnerabilities in critical infrastructure.
Bailey identifies cyber threats as a continuously evolving concern, necessitating ongoing vigilance from financial institutions.
Recent US bank failures illustrate another risk: the speed of modern digital bank runs, highlighting the ongoing reliance on trust in the banking system.
The interconnected nature of banks remains a key factor. Their role as the lifeblood of the economy, facilitating credit, wages, and savings, makes their stability paramount.
The core lesson from 2008—the fragility of the system and the potentially devastating impact of banking instability—remains as relevant today as it was then.
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