Philip Hammond was right to halt the re-privatisation of RBS – it's time to dismantle it

One of Philip Hammond’s first moves, after arranging his desk at Number 11 Downing Street, was to put the re-privatisation of the Royal Bank of Scotland on indefinite hold.

A wise move. His predecessor George Osborne’s decision to start selling the state’s stake last year with the shares languishing at a 52-week low was one of the more questionable decisions he made during his decidedly chequered career as Chancellor. It crystallised a £1bn loss for the taxpayer.

However, since then RBS’s situation has deteriorated still further. Shares Osborne sold at 330p are now worth a third less, and while Brexit has played a role, that act of lunacy is far from being the only problem RBS faces. It might not even be the biggest one.

On its way is a truly enormous fine from the US for the bank’s involvement in flogging dodgy mortgages in the run-up to the financial crisis, while RBS continues to fight a lawsuit brought by former investors (it has managed to settle with some of them). Another battle looms with business borrowers who found themselves at the mercy of the bank’s Global Restructuring Group (GRG), which did a fantastic impression of Despicable Me’s Bank of Evil before it was shut down.

But even when that chamber of horrors is dealt with, would you be confident in putting money on the bank having dealt with all its issues under the heading “past misconduct”? Would you be confident that it can keep itself clear of future trouble?

I wouldn’t. And it seems the City is with me. The performance of the shares tells you all you need to know. They are now trading at less than half the 502p the state needs them to reach for it to break even on its investment.

It has now been eight years since this bank was bailed out. The two chief executives to succeed Fred Goodwin have spent much of their time fighting fires of one kind or another. RBS has become the banking equivalent of the walking dead and worryingly, it’s proved that it can still be as hostile as any headhunting zombie.

Take the issues with GRG: the worst element of that scandal emerged after Goodwin had disappeared off to the South of France to escape his critics. Some have argued, not without justification, that the toxic culture that he allowed to grow within RBS is so deeply ingrained that it cannot successfully be purged without radical reform.

The Treasury’s outgoing permanent secretary admitted earlier this year that the taxpayer might have to put up with further losses. That being the case, isn’t it time to think very seriously about other options for the future of RBS? Just this week Labour Co-operative MPs tabled one possible idea. They put forward a Ten Minute Rule bill in the House of Commons that called for the bank to be mutualised and turned into a customer-owned building society.

It’s a superficially attractive proposal. Making a “people’s bank” of RBS, with provisions in its articles of association to prevent the carpet bagging that killed off the majority of those institutions in Britain, should in theory re-orient its focus towards serving its customers.

However, it’s worth remembering that not all mutuals are good mutuals. Lots of people hold Nationwide up as an example of what can be achieved by them. Set against that is the Britannia Building Society, which nearly brought another mutual, the Co-operative Bank, down when the two merged. That is by no means the only cautionary tale from the mutually owned sector. Customer-owned institutions are a good idea in theory. They haven’t always worked in practice. A bad board, or just a bad chief executive, can destroy the benefits they ought to offer.

Mutualising RBS would also be a complex, and potentially costly process, because the bank’s private investors would require compensating. At current prices their share of the bank is worth £7.5bn and that’s money Philip Hammond doesn’t have to spare.

A more radical, but potentially cheaper, option would be to explore a break-up. Carving RBS up could potentially be accomplished without the need to compensate other investors if the constituent parts were set up as regionally based “challenger” banks with new identities, new managers, and their own stock market listings. Instead of one share in RBS you’d get a handful in some new institutions that would have a strong incentive to focus on serving the communities in which they operated, and providing a return to their investors by so doing.

Something like this has been discussed before, but the concept has always been pooh-poohed. Too complicated. Too difficult to achieve. Better the devil we know.

Given the way RBS has lumbered along like a wounded animal, that may need to be reassessed. Can anyone really look back at the way RBS has operated over the last year and say it’s been good? That anyone, apart from the executives who have continued to pocket bonuses, has done well out of it? I rather doubt it.

If you don’t like that idea, fine. Come up with something else. It surely couldn’t be any worse than the status quo.