The end of the UK’s ‘bailout era’

0:00In 1898, John Nuveen had a vision to underwrite municipal bonds that would propel American infrastructure into the 20th century. More than 125 years later, that vision lives on. Today, Nuveen has grown into a leading global asset manager with expertise spanning public and private markets, still investing with a future in mind. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. Late last month, the UK government privatized the final bank that it bailed out during the 2008 financial crisis. So it's a very symbolic moment, the closing of this whole chapter of Britain's bailout era.

0:45It was a huge deal for the bank, and it was even more awaited and dramatic because it took so long to happen. I mean, it had been 17 years. That bank is called NatWest Group. It used to be called Royal Bank of Scotland, or RBS. And you heard that right. The UK government had been the bank's owner for the last 17 years. And that had plenty of knock-on effects. So owning the stake in RBS in the Netwest was a pretty big drug in the government finances. It was expensive for taxpayers. The government never recouped the money they put in to bail it out. And that, in turn, kind of squeezed public spending in other areas.

1:26But even though this chapter, this bailout era is closed, its impact still lingers for the UK economy and especially for the country's financial sector.

1:42So the return to private ownership for NatWest is amazing news for the bank, but for UK banking and the UK's economy in general, both the industry and the country at large are still dealing with the other effects of the crisis.

2:02I'm Michaela Tindera from the Financial Times. Today on Behind the Money. We're looking back at how the government bailout of NatWest, formerly known as RBS, changed the bank and the UK's economy. And what does it mean for the UK now that it's officially ended its bailout era?

2:32In the years leading up to the 2008 financial crisis, my colleague Akilah Kino, who covers banking, tells me that the Royal Bank of Scotland, or RBS, was eager to expand. So around that time, before the crisis, the bank had an insane appetite for growth. So they just did a series of acquisitions in different countries as well, notably in the U.S., and they grew and grew and grew. The biggest of those was in October 2007. That's when RBS led a consortium of banks to buy a majority stake in a Dutch bank called ABN AMRO. The deal expanded RBS's balance sheet to£2.2 trillion, making it the world's biggest bank.

3:14So it's still to this day one of the largest deals ever made in banking. It was a 49 billion pounds deal. And the bank really went against logic and advice in making this acquisition, which was largely made in cash. So it left it undercapitalized, which put it in a really vulnerable position. This acquisition of ABN AMRO also increased RBS's exposure to toxic subprime mortgage loans in the U.S. So let's just say that things are extra, extra precarious by 2008, which is when banks are teetering all around the world. Lehman Brothers filed for bankruptcy protection just after midnight. The bankruptcy of one major Wall Street investment bank.

3:55Thousands of Northern Rock savers have queued for hours. It branches to empty their account. Not in generations has Wall Street absorbed the number of body blows it took today. And by the first weekend in October that year, it's looking like the world's biggest bank might fall too. Wholesale funding markets were closing. banks struggled to raise money. RBS was sitting on huge losses linked to some of its riskier activities. So the fear was that, you know, when the market would open on the Monday and people would find out that the bank was in such trouble, that it was having discussions with the government, you know, the share price would crash and then everyone would rush to take out their deposits.

4:37One of the people I interviewed was Charles Randall, who was the lawyer for the Treasury. advising them on the bailout. He said, like, the fear that weekend was that they would have to send in the army to protect branches from people looting them to get their money back. So it would have been chaos, basically. To prevent that chaos, the U.K. government decides to bail out the bank. So at this point, the government felt that they had no choice but to save the bank. So the U.K. injected£45.5 billion of taxpayer money into RBS to prevent a collapse. And so what this means is that in exchange, it took an 84 % stake in the bank.

5:15So it essentially nationalized RBS and became the direct owner of the bank. Akilah, let's pause for a sec here. Help me understand, what was the reputation of RBS back then at the time of the bailout? Terrible. They were just, they had the worst reputation. And I think there was a lot of public anger around the former chief executive, Fred Goodwin, who led the bank into trouble. And, you know, they really came to represent like one of the hubris that was present in the lead up to the crisis, more so than others, because there were systemic issues. But RBS was the most reckless and people really resented that.

6:03This isn't the only bank that the UK government and taxpayers have to step in and save around this time. Lloyd's was another, though the bailout was about half the size of RBS, only about 20 billion pounds. Plus, RBS does end up being the only one that stays under government control for 17 years. So why did it take 17 years for the government to release RBS? Akilah tells me she thinks about what the bank had to do to right itself in three separate eras. So phase one is get rid of the toxicity. So, I mean, immediately after the bailout, the only thing the bank had to focus on was clean up their act.

6:48Like, you know, unwind their position in toxic assets and just be a clean, good bank, which was hard because they were in such a mess at the time. And how long did that take roughly for them to get through that? That took several years, and they weren't profitable for 10 years because they had to focus on that and not profitability. So they couldn't grow. They had to divest some of their most profitable businesses. They were forced to do that because it was a condition of the bailout set out by the European Commission. So they weren't really in the business of thinking, like, how can we thrive as a bank?

7:24Phase two was all about shrinking. So phase two is, let's just come back to the U.K. Let's become a U.K. bank. And remember, they're the largest bank in the world by assets. They have a huge presence in the U.S. They have an investment bank. So, you know, that also took time to sell various businesses abroad. Akilah says these first two eras were kind of like doing renovations on a really old, broken down building. They had to, like, tear down some walls and rebuild some walls and do all of the kind of, like, heavy lifting over years, which was slow and painful. And then the final part, once they had done all of that and the bank was profitable, they were still left with this image of the bank that had almost brought the country into ruin.

8:07So it's almost like after they'd done all this hard work inside the building, they then wanted to repaint the facade. And that was kind of like the last thing to do. So eventually in 2020, they did rebrand. They changed their name from RBS to NetWest, which had been the name of one of the bank's subsidiaries before. That name change moves them further away from the tainted RBS brand. And over the next few years, the UK government sells down its stake in the bank until finally, a few weeks ago, the government sold its last shares.

8:45Akilah, help me understand now just this moment of NatWest reprivatizing. How big of a deal is this for NatWest? So it's a big deal for the bank in the sense that their focus has been so far on returning all of the excess capital they have to the government to buy back their stake and accelerate that process. So now when they have surplus capital, they can think of more creative ways to use it. They can make acquisitions. They can grow. They can also bring in new investors and say, look, there's no risk of government intervention here. And how is the bank doing now? They're still a very different bank than they were at their peak.

9:23So, you know, at its peak, RBS had a£2.2 trillion balance sheet. And now it's about£700 billion. So it's still like a tiny bank in comparison to what it was. And they're now looking to grow. And so they're one of the names that is being floated in terms of making offers for acquisitions. So we've reported that they made an offer to buy Santa Ana de Gros, the UK business. So yeah, they're in growth mode. So now NatWest is on to its next era, a privately owned era. And it's doing well. But Akilah tells me that the U.K.'s economy can't really say the same thing. When NatWest and other banks look around them, there are a lot of other lingering effects of the financial crisis.

10:15The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. Okay, Akilah, so now we know how RBS, now known as NatWest, changed after its bailout and its long path to recovery.

10:54But let's talk more about the UK economy. Now, this is a big question, I know, but how has the UK economy fared since this RBS bailout? Yeah, so that is a big one. And other things happened to the U.K.'s economy like Brexit since. I think we can think about the effects of all this crisis in a couple of ways. So first off, just looking at some big data points since the financial crisis, U.K. productivity, which is a measurement of output per hour worked. That had really been on the rise before the crash, and it never recovered. It still hasn't recovered. The country's deficit widened. GDP took years to recover.

11:35And then secondly, you know, when the government had to bail out all these banks, they had to use taxpayer money. And then the result of that was that that money wasn't spent on other programs. So, you know, things like health care, education, transportation, what have you, it brought a period of austerity and really hurt public finances. Right. And of course, I mean, all of that isn't directly attributed to what happened with RBS. but can you just help us understand or picture, you know, how much of a drag owning RBS was on the UK government? Yes, so that's right. I mean, this is the bailout era that we're talking about.

12:13So it wasn't just RBS, although RBS definitely was the most dramatic and expensive of them all. So the problem with owning RBS was that it was loss-making for years after the bailout. It did not become profitable until 2018. And so because of that, its share price remained lower. than what the government had paid during the bailout. And in the end, what it meant was that the government never recouped the money that they put in. So they made a loss effectively. They actually received£10.5 billion less than they had paid to rescue the bank. So more specifically, what impact did all this have on the financial services sector in the UK?

12:51Yeah, the UK's economy is very dependent on financial services. It has a long history of finance. I mean, the City of London is one of the world's major historical exchanges and financial centers. And so that sector took a massive hit. So all of that has huge consequences for the economy. So a lot of regulation also came in after the crisis, which obviously is not surprising. And these regulations were primarily designed to make banks safer, which is good. But it's definitely also kept the UK banks smaller than some of their American competitors. So, for example, Barclays still retains an investment bank, but it's dwarfed by American banks like Goldman Sachs, J.P.

13:31Morgan and Morgan Stanley. So there is a kind of challenge for U.K. banks to compete on the global scene. So now that the government is finally free from owning this bank, what are their plans to tackle these issues you mentioned, like the low productivity or the less competitive banking sector? So, yeah, this government does have plans. They're very eager to present themselves as a business-friendly government. So, you know, they're always talking to the financial sector. Things they're doing, they've reminded all of the regulators about their duty of promoting growth, what they call their secondary objective.

14:05So it's not just about protecting financial stability and supervising companies. It's also about boosting growth. So a big way that they're doing that is actually considering pulling back some of those regulations that were put in place after the crisis, that they see as slowing down growth and productivity, such as ring fencing. So ring fencing is a regime that's quite specific to the UK, where banks have to separate their retail operations from their investment banking operations to protect consumers. The government is doing all of this in an effort to boost growth and listen to business, but it's not clear yet how far they'll go and whether it will work.

14:43Right. Okay. So yeah, as you say, a big focus of theirs is pulling back regulation. But is there anything else that they're focused on outside of that to boost growth? Yes. So there is a lot they're doing, and it's not all about banks and banking. So, you know, for instance, they're trying to get UK pension funds to take more risk, including by investing more in domestic assets to help fund infrastructure plans. You know, they're shaking up the planning system to get Britain building more homes and buildings. They're changing the way some parts of the social security system work to get more people in work.

15:15So generally, across all sectors, they are basically cutting red tape in an effort to boost growth. Now, I have to ask, is there any risk in boosting the banking sector and peeling back some of this regulation? I mean, couldn't that just put the UK in another vulnerable position once again? I mean, is the UK just setting itself up for another bailout era in, you know, 10 or 15 years, something like that? Well, so this is the big question. And, you know, with this symbolic moment signals is a change of near, you know, a vibe shift or whatever you want to call it. And currently in the UK, but also in the US, the mood is very much deregulation, like drawing a line under the crisis and focusing on the future and growth.

16:01And, you know, are we going to repeat the mistakes of the past? Well, banks are much better capitalized now. I mean, the whole regulatory system is focused on not letting that happen again. And people have very much integrated this idea that certain banks are too big to fail. So in that sense, I don't think regulators worry that we're going to see an exact repeat of the RBS situation. Where they are increasingly concerned or, you know, focused on is actually more private credit and the whole shadow banking world. So non-bank institutions that have replaced banks where they were treated in some of the riskier areas of finance.

16:43So yeah, we're in a different place for sure. And there is always a balance between growth and regulation. Does it make sense to have a conversation around where the equilibrium is? Yes. Does it come with risks? Yes, as well.

17:05Behind the Money is hosted by me, Michaela Tendera. It's produced by me, Safia Ahmed, and Katya Kumkova. Our intern is Michaela Sia. Sound design and mixing by Simon Pinay. Original music is by Hannes Brown. Special thanks to Kat Rudder-Pooley. Our executive producer is Flo Phillips. Topher Forges is the FT's acting co-head of audio. Thanks for listening. See you next week.

18:01Transcription by CastingWords