The Tyrie Commission and what next for RBS

The frenzy over the future of state controlled Royal Bank of Scotland is set to hit a crescendo in the coming weeks as an influential parliamentary commission prepares to publish a long awaited report into UK banking culture.

The idea of splitting the Royal Bank of Scotland into a good bank – ripe for reprivatisation – and a state-run bad bank holding RBS’s toxic assets has been raised as an option in a draft report on banking standards. This would see souring ‘toxic’ assets taken on by the state with a smaller healthier RBS able to increase lending. On Tuesday the BBC reported that the commission would indeed call for RBS to be broken up.

However, sources on Andrew Tyrie’s parliamentary banking commission say that the good/bad bank split is not a firm recommendation in the draft report, rather it reflects the enthusiasm of some of the 10-member team for the idea. Lord Lawson, former Conservative chancellor, is among the peers and MPs who support the split, which they believe would increase the likelihood of the bank returning to profitability – a view shared by Sir Mervyn King, the outgoing Governor of the Bank of England. However, the idea of a split is not supported by the coalition government. The incumbent chancellor, George Osborne, has argued that a split would require a full nationalisation of the bank, a move that he is anxious to avoid.

Yet the future of RBS is a relatively incidental part of the commission’s work. The main focus was on raising banking standards, competition, sanctions and remuneration in the sector. But to focus on RBS would be beside the point. The bulk of the parliamentary report, which was commissioned in the wake of the Libor rigging scandal last summer, is about industry wide issues. These include pay, competition, the sanctions regime and regulatory oversight, according to a person close to the commission. Three pages will be dedicated to “the way forward” for the banking industry.

Whatever the recommendations are, they are likely to be contentious. Indeed, any new recommendations will have to compete with increasing EU regulation on the matter. In April, the European Parliament passed new rules relating to bankers bonuses and the amount of capital banks must possess. The package was agreed with the 27 EU governments and most of it is likely to take effect on 1 January 2014.The EU plans to cap bonuses at 100% of a banker’s annual salary, or 200% if shareholders approve. The package, called Capital Requirements Directive 4 (CRD4), brings the EU into line with the so-called “Basel III” rules on banking standards, which set new capital requirements for banks. MEPs want banks to hold more money in their reserves, in order to stop them going bust. But they have also pushed for banks to focus on lending to the real economy, especially small businesses and business start-ups. Under the new rules, banks will also have to provide more data about their profits and taxes, on a country-by-country basis.

Whatever proposals the Tyrie commission eventually recommends, it is clearly reporting during a period of significant change for the financial services sector worldwide.

Sources include: the Independent, Reuters, the New York Times and Europa.

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