'Totally inappropriate' to break up RBS, says former boss

Sir George Mathewson, the former Chief Executive of Royal Bank of Scotland (RBS), has said that it would be 'totally inappropriate' to break up the bank, responding to Business Secretary Vince Cable who has called for the lender to be split up.

In a leaked letter (dated February 8th), the BBC revealed yesterday that Cable has proposed turning RBS into a "British business bank" after inheriting from the previous Labour government "a banking industry structurally ill-placed to serve the needs of productive businesses."

He said that the new bank should be designed to lend to small- and medium-sized enterprises (SMEs) and could be used by the government to support its "other industrial objectives", such as "supporting exports and sectors identifies as of strategic importance".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Cable's letter, which was written to Prime Minister David Cameron and Cameron's deputy, Nick Clegg, said: "my suggestion is that we recognise that RBS will not return to the market in its current shape and use its time as ward of state to carve out of it a British business bank with a clean balance sheet and a mandate to expand lending rapidly to sound business."

Mathewson, who was the head of RBS between 1992 and 2001, told the BBC today that previous schemes for helping business in which the government is directly involved haven't worked - "they've become bureaucratic, slow to decision-making", he said.

"I do think that to break up the major provider of funds to our existing small businesses is not the correct way to react to this issue [...] I think we should all work harder at getting the relationship correct between bankers and the customers," he said.

That relationship has changed dramatically over the last few years and the "climate of trust that existed before has reduced markedly [...] No longer does it feel that they are in a joint collaborative effort with the banks."

Mathewson blames the new capital requirements that have been imposed on banks for holding back lending to SMEs - "it's just become so expensive that the banks are driven to try and make a return on capital [and] the terms to business become more difficult," he said.

BC