Creating a New Mutual Bank

Why does RBS need to divest itself of Williams & Glyn?

State Aid
The Government bailout of RBS following the financial crisis was considered to be state aid by the EU Commission[1].   As a condition of allowing the state aid to take place, RBS was required to divest itself of Williams & Glyn. This was due to take place by 31 December 2013 and was later delayed to the end of 2017[2].  The original plan to sell it off was later changed to create a separate entity as there were concerns about the costs of creating a separate IT system.

IT Systems
An original bid from Santander for £1.65bn in 2012 failed largely due to IT complications. In 2016 however both Clydesdale/Yorkshire Banking Group and Santander expressed an interest in buying Williams & Glyn.

It was reported in an FT article ‘Williams & Glyn sale faces Bank of England review’ that the PRA has expressed concerns about the transfer of customer data to a buyer’s IT system and that an independent review may be required.

RBS warned in October 2016 that the bank would miss the deadline for divesting itself of Williams & Glyn by 31 December 2017 which would result in a fine from the European Commission.

Competition in Retail Banking
In addition, the CMA has highlighted its concerns about a lack of competition in the retail banking market.  The BSA argues that a range of different ownership models is an important factor in creating and sustaining a more competitive and resilient banking sector.  Cass Business School[3] has found evidence that building societies’ profits are more stable than banks and have higher z-scores (a measure of stability).  Building societies, credit unions and other financial mutuals were created with a fundamentally different purpose (often social) when compared with shareholder owned businesses (which exist to deliver shareholder value over time).

One possible solution?

In light of the challenges RBS have faced in spinning off Williams & Glyn as a separate shareholder owned bank or finding a willing corporate buyer for the business, other alternatives should be explored to deliver the same outcome.  Following the demutualisations of the 1990s the UK banking sector is substantially more concentrated in a small number of shareholder owned banking groups than many of its European and international peers.  Converting Williams & Glyn to a mutual customer owned bank would materially increase the diversity of the UK banking sector in the national interest.

Why a mutual bank rather than a building society?
As a mutual bank[4], Williams & Glyn would be allowed to continue with its current range of retail and commercial deposit taking and lending, without the restrictions building societies face on minimum retail funding and residential lending, but will bring the benefits of mutuality to consumers in retail financial services.[5]

How could this happen?

As in the separation of TSB from Lloyds Banking Group, a new Williams & Glyn could share systems with RBS Group for an extended period if required.  The separation is a necessary condition of meeting the EU state aid conditions, so must be done in any event.

Mutualisation could take a number of forms including:

  • offering mutual shares to existing customers with a cap of £1,000 per holding or creating a genuine people’s bank with mutual shares being issued to all UK tax payers:

    • Such shares participating in dividends, but not in retained earnings

    • With voting on a one person, one vote basis

    • Deferred consideration payable from retained profits either to RBS Group or the UK Government over a long period, and

    • A government held golden share to prevent future demutualisation

If mutual shares are to be sold for consideration (rather than gifted) Core Capital Deferred Shares (CCDS) could provide a suitable model, as used by Nationwide Building Society.

[1] http://ec.europa.eu/competition/state_aid/cases/233798/233798_1093298_30_2.pdf
[2] http://ec.europa.eu/competition/state_aid/cases/251760/251760_1565386_205_2.pdf
[3] ~/getmedia/5973984b-4efb-4286-9071-e67e6357114b/Cass-Business-School-summary-report.pdf
[4] In referring to a mutual bank this briefing refers to concept rather than a formal legal structure.
[5] Schedule 6 of the Building Societies Act requires building societies to carry out at least 75% of its lending on prime residential mortgages and Schedule 7 requires building societies to obtain at least 50% of its funding from retail savers.