ROYAL BANK OF SCOTLAND

A series of rash statements issued yesterday by the Royal Bank of Scotland is clear on two points. Firstly, the decision taken to create an internal ‘bad bank’ with toxic loans amounting to £38 billion will hardly provide an instant cure. It will take a further three years of write-downs and bank disposals before the institution will even be considered to have recovered from its 2008 financial collapse and taxpayer funded rescue.

The second relates to serious deficiencies in the day-to-day management of RBS – from its chronic failure to meet targets on lending to small and medium sized firms, through shortcomings in service to personal customers, and to the provision of £250 million made by the bank for mis-selling payment protection insurance.

It is extremely unlikely there will be any start to the sale of the bank back to the private sector until well after the General Election.

RBS has announced a bottom-line loss of £634m for the three months to September. Far from the internal ‘bad bank’ resolution being hailed as a panacea, it is little wonder that shares in RBS have slumped. Even in its darkest hour of 2008, few would have believed that the recovery of what was then the UK’s largest bank would have taken eight years and a massive restructuring and shrinkage of its business. RBS has suffered a major curtailment in much of its global business and activities, not just the unwinding of the vainglorious acquisitions of the Fred Goodwin era but is also shorn of the overseas expansion delivered by his predecessor, Sir George Mathewson.

The protracted period of indecision on whether the bank’s bad loans – much of them incurred in Ireland by Ulster Bank – should have been left with the government or treated as a separate entity, is a nettle that should have been grasped in 2009 rather than allowed to have festered for the length of time it has. Chancellor George Osborne had had to recognise that RBS’ problems – structural and cultural – will take far longer to resolve than the government first anticipated before a share sale can be undertaken.

The traumatic legacy of its near-collapse remains problematic today. This induced a deep reluctance within the bank to lend, in particular to small and medium-sized businesses. A highly critical report by Sir Andrew Large found RBS was performing so erroneously it was not even in a position to meet its own targets. In the meantime, a review by RBS into how it serves its personal customers is scheduled to report next year.

The bank still has a mountainous task ahead under its new chief executive, Ross McEwan. There is much to do to overhaul the bank’s lending practices; by moving away, for instance, from the sales target-driven excesses of the previous era and by making major improvements to its overall service to customers.

RBS will eventually revert to being a domestically focused retail bank, stripped down to those core banking competencies it should never have deserted in the first place. The biggest challenge ahead will be to rebuild customer and investor trust. The bank’s widespread loss of confidence makes that a daunting and difficult task.