The End of the Abbey Habit

Today saw the Spanish Banco Santander Group announce that it will be re-branding its UK subsidiaries Abbey and Bradford and Bingley as Santander UK with immediate effect. For Abbey, once an industry leader in the mortgage and savings market, and a pioneer of building society de-mutualisation in the late 1980s, this seems a sad end for a once well known British brand.

Abbey can trace its roots right back to the National Permanent Mutual Benefit Building Society established in London in 1849, in compliance with the 1836 Building Societies Act which allowed the creation of societies to lend money from subscribers to fund house building. In 1874 the Abbey Road & St. John's Wood Permanent Building Society was formed in north west London. In 1944 this society, now the UK's second largest merged with the National, by this point the sixth largest society, to create Abbey National, with assets of £80m, to exploit the expected post war building boom. The society, rooted in the affluent south east, prospered; by 1968 the society had assets of £1 billion and a network of 150 branches. Despite the poor economic conditions of the 1970s the society continued to prosper, compiling assets of £5.8bn by 1979, supported by a network of 500 branches. The brand was also a very strong one, with its clever logo of a couple holding up an umbrella that was also a house roof, while youngsters were told to 'get into the Abbey habit' (habit, Abbey, monks), later, saving with Abbey was 'the habit of a lifetime.'

In 1989 the Abbey National was the first building society to take advantage of the Thatcher government's de-regulation of banking, converting itself into a bank by granting its members shareholdings proportional to their savings. It would be easy, and lazy to suggest that the demutualisation of Abbey was what led to its eventual purchase by Santander in 2004. Like industry contemporaries Halifax and Northern Rock, there was nothing inherently wrong with Abbey National's business model as it stood. However, the company diversified into new operating areas in which it lacked experience, notably wholesale lending and the insurance industry. Exposure to the Enron collapse of 2001 coupled with a slowdown in the wholesale lending market damaged the Abbey National. In an attempt to fight back the company restructured in 2003, with new Chief Executive Luqman Arnold expensively re-launching the consumer brand by dropping the 'National' from the name, and introducing a new logo and colour scheme, to try to paper over the cracks. Consumers were not convinced by this however, despite the aim of the rebrand being to make the Abbey a more radical, friendly bank.

Santander steered Abbey capably through the financial crisis of the late noughties, notably avoiding exposure to the US sub-prime mortgage market. What remains less clear is how well Abbey's customers, and those of other banks, will take to the Santander name, so far only known in Britain via the company's sport sponsorships, notably in motor racing (Abbey's corporate identity has been identical to Santander's since 2004). One thing is for certain; the disappearance of the Abbey name is a reminder that nothing in business is permanent, even in 'permanent' mortgage banking.

Northern Rock split a poor policy decision for the future

Today the EU approved the UK government plan to split nationalised bank Northern Rock into two. One half will become a so called 'good bank', to be flogged off to a private company while the other half will become a 'bad bank' and remain in the state sector. The bad bank will keep all of the Rock's 'toxic assets', such as the 100% plus mortgages which the bank was left holding after the US financial sector suddenly lost interest in 'repacking' them as AAA securities (which weren't) in 2007.

The government apparently intends to return the 'good bank' to the private sector by the 2010 General Election. Given that that will be in May or before, the privatisation will happen almost straight away in business terms - a very quick privatisation. Although no doubt there will be a competitive process to buy the good bank, bidders, who could include Tesco Bank, Virgin Money, or the National Australia Bank, will be buying a business which would almost need rebuilding from scratch as a credible savings and mortgage bank. Meanwhile taxpayers will be left holding the toxic assets in the bad bank, and could possibly be paying for them as generations. Surely it would be wiser to rebuild Northern Rock in the public sector, but with private sector style management for a ten or twenty year period to restore it to profit, before releasing it back on the market for a much larger sum? Its not as if there are not precedents. Even the privatisation hungry Conservative government of the 1980s knew this; British Steel was a basket case nationalised industry suffering serious losses when the Conservatives came to power in 1979. By 1988 it had been turned around by new management who closed unprofitable plans, improved the company's marketing strategy and made it a world productivity leader in the industry. In the car industry the basket case British Leyland, nationalised by Labour in 1975, was also returned to the market successfully by Mrs Thatcher's government in 1986, again with unprofitable parts of the company closed and the company's trade union problems resolved. If we must have government intervention in industry, why can't we turn it around and make it a good investment for the taxpayer?

RBS insist they've learned from their history

Today the Royal Bank of Scotland (RBS) submitted a document to the Scottish Parliament's inquiry into 2008's banking crash, insisting that the bank has accepted responsibility. Those executives believed to be responsible for the crash, of which RBS was at the epicentre in the UK, had left the business. Time will tell whether RBS truly have learned from their previous errors or whether similar mistakes will be repeated in future.

RBS would have done well to have heeded the past example of the City of Glasgow Bank, the ghost of which has stalked Scottish banking since its collapse and bankruptcy in 1878. Infact this collapse came just twenty one years after the collapse of the Western Bank of Scotland in 1857, from which the lessons had already supposedly been learned. In a time when Scotland's 'public' banks (those with Royal Charters), the Bank of Scotland and Royal Bank of Scotland had very conservative lending and deposit regulations, as well as very small branch networks, banks such as the City of Glasgow Bank attracted a great diversity of business and personal customers from the new middle classes. Many investors from the middle classes were also shareholders. What was unknown to most of these customers was that the bank's directors had fallen into the influence of a small group of Glasgow merchant houses which managed to borrow (a then) large sum of £5m between them with no likely repayment schedule. By comparison the deposit base was £8m; eventual net liabilities were shown to be £6m. Money had also been lost gambling on US railroad securities, and in gambling on mining stocks and in Australasian farming.

The bank was closed suddenly by the directors on the 2nd of October 1878; the doors of each branch were locked and there was no possibility of a Northern Rock style run. Rumours about the security of the bank had been circulating for some months on the London market, where confidence in the bank's bills had been falling. The closure of the bank rendered this paper useless, as well as making it impossible for depositors to reach their funds. At this time there were no government bailouts for banks, nor government deposit insurance. Depositors were eventually fully repaid from calls for payment made to the shareholders, who eventually faced calls of £2,675 against a £100 holding. At this time banks did not have limited liability as it was thought this would reduce public confidence in them; this meant the shareholders were liable for all of the bank's debts. Many of the shareholders themselves ended up being made bankrupt, although they were given shares in the Assets Company Ltd., which pooled many of the bank's remaining assets which were still of value, giving them some recompense in the longer run. And the directors? They didn't just lose their jobs - they were sent to prison.

Regulation - escaping capture

Yesterday I talked about how regulation helped to shape the television industry in the UK. But what of industries that shape the regulator? Today two stories about regulation in the banking and finance industry caught my eye. Firstly the European Union unveiled its tentative plans for banking 'super-regulators', intended to form a supra-national banking authority capable of intervening in the regulatory affairs of member states. Its hoped that this structure, which would create a European Systemic Risk Board to monitor levels of future risk, as well as watchdogs specific to the banking, insurance and stock exchange sectors. It remains unclear what will be considered a bad risk or bad banking, insurance or stock exchange practice, but the proposal may well be a good one, especially as it appreciates the need for an international approach to what is today a very international industry.

Meanwhile back in the UK Lord Turner, Chairman of the UK regulator, the Financial Services Authority (FSA), argued last night that 'radical change' was required in the UK financial sector, in which banks must focus on their 'essential social and economic functions'. This is code for going back to the boring old days of the clearing banks which effectively operated as the cogs for the system, with merchant and private banks as well as building societies indulging in most of the risky stuff. Whether this should happen or not is another post, but first we should decide what we want our banks to do. Then to encourage them to do this we will have to remove people with banking or financial interests from the regulatory sector to prevent 'regulatory capture', in which poacher turns gamekeeper. Industries tend to be rather close knit, with management personnel frequently moving from firm to firm and knowing those at other firms well; they may even have attended the same universities or even schools. The potential, then for a banker who is hired as a regulator, no matter how well paid, to view his friends in a neutral way seems low, further they may even emphasize with practices considered fashionable in the banking industry but which are perhaps not in the public interest. If we are to create a European regulatory organization, the worst starting place would surely be to staff it with former bankers. Regulators need to be recruited from other areas - well informed, but with a different background and different interests to those they regulate.

By way of exemplifying the UK situation - the present CEO of the FSA, Hector Sants, has an impressive CV including having worked for Credit Suisse First Boston, as well has previously having been a director of the London Stock Exchange. Deputy Chair Hugh Stevenson is presently Chairman of Equitas Limited, an re-insurance company, and The Merchant's Trust Plc., an investment trust, and has numerous past positions in the finance industry. Sants and Stevenson would no doubt argue that their experience in the financial industry puts them in an excellent position to oversee good practice in the industry. But as Sants and Stevenson have both had senior positions at the FSA since 2004, well before the present crisis, does the reality of their tenure suggest that they have done this?