It’s not about the Scots, it’s about the institutional memory

So, we’ve been talking about the UK side of the banking crisis on Crooked Timber, and the discussion has taken a mildly anti-Scottish turn.

Now, that’s just wrong – although three of the UK’s largest retail banks pre-crisis were technically Scottish companies (Lloyds TSB, HBOS and RBS), only RBS was genuinely run out of Scotland by a Scottish management team. HBOS was, in all meaningful rather than purely legal senses, created by Halifax’s takeover of Bank of Scotland, just as Lloyds TSB was created by Lloyds’s takeover of TSB.

However, it does lead onto an interesting alternative point: if you take ‘failure’ to mean ‘bankruptcy, administration or emergency takeover for a token fee’, then all the major failed UK banks (RBS, HBOS, A&L, Northern Rock, B&B) are non-London banks – and all of the major non-London quoted banks (the Co-Op is, err, a co-operative) have failed.

Yes, two of the London banks are emerging markets banks that happen to be British-based for historical and cultural reasons (sure, HSBC has a UK presence, but it could nonetheless be closed tomorrow without destroying the group, while Standard Chartered doesn’t even have that), and therefore haven’t been significantly squeezed by the problems faced by UK mortgage banks. Still, Barclays derived 40% of its 2007 revenues from UK retail and commercial banking and doesn’t appear to have been wiped out, while Lloyds TSB is almost exclusively a UK retail bank [*].

Another point made on the thread is that the failed banks, aside from RBS, are primarily demutualised building societies, failing on their both home turf and their desired new ground and dying as a result – like Stringer Bell. But that doesn’t explain why the London former building societies (Abbey/Santander and Woolwich/Barclays) sold out to banks for large premiums when they had the chance, while all the regional ones kept going, or selling themselves to other former building societies for stock, until they hit the ground.

Update: Daniel points out that Abbey actually managed to post a massive loss and destroy value whilst property was still booming and money was cheap, after its US wholesale loans business went titsup in 2002, and that this was a driver behind the 2004 Santander takeover. While this is true, the bank was still worth £10bn and was still a viable independent entity at the time of the buyout – to me that’s not quite in ‘failed bank’ territory…

My theory, for what it’s worth, is that the biggest driver for UK bank success/failure was indeed buiilding society demutualisation, which created institutions that had to answer to external shareholders but didn’t have the real banks’ long history of having to balance liquidity risk and shareholder expectations. Lloyds, HSBC and Barclays have long institutional memories of previous bubbles, crashes and disasters; the former building societies don’t. So the first lot could resist the pressure from shareholders to crank up risks for greater returns, while the second lot couldn’t.

The theory has two main flaws: it doesn’t cover RBS, and it doesn’t cover why the London former building societies sold out when things were good.

I think they’re vaguely related: RBS, with its ‘swashbuckling plucky raider’ image, led the path down which the other demutualised banks followed.

The people involved genuinely thought they were creating a new model of UK financial services with London no longer at the centre – and for the former building society guys, the fact that a real bank with a 350-year history was doing the same kind of geared expansion (international acquisitions rather than domestic mortgage share, but it was still buying revenue with risk) vindicated their model.

Meanwhile, the London demutualised guys, with more contact with the established industry and no comparable sense of regional pride, viewed themselves as second-tier London banks who did exactly the same thing as the serious players but slightly less well – and therefore accepted large wodges of cash to sell to people who knew what they were doing as soon as it was in their shareholders’ interests to do so.

The one bit I don’t quite understand is why RBS behaved like a comedy bank instead of a serious one. Well, “shareholders blinded by charismatic guy who gets excellent returns when things are good, and who says that his brilliant ideas have transformed the company so that old concerns about recession are no longer relevant” probably has some relevance, but that shouldn’t be enough. Were Edinburgh’s business establishment so enthused by the concept of a real national champion that they overlooked the risks RBS was running? Or were the big London banks just lucky, and in fact RBS was a ‘but for the grace of God’ play?

[*] the theory falls apart if you think Lloyds is taking the current round of government capital because it’s in trouble. My view is that it’s taking it so that it can get HBOS’s assets for next-to-nothing and ensure it remains as liquid as it currently is no matter what happens. That could be spin – but if so, then Lloyds’ City PR firm deserve every penny they’re getting and more.