The Royal Bank affair

Allan Massie

Edinburgh `No, no, 'tis no laughing matter; little by little, whatever your wishes may be, you will destroy and undermine, until nothing of what makes Scotland Scotland shall remain . . .' (Sir Walter Scott). The pursuit of the Royal Bank of Scotland by Standard Chartered and the Hong Kong and Shanghai Bank is the most portentous event in recent Scottish economic history. But the effects of its outcome will not be confined to Scotland; they have importance for Great Britain as a whole.

To set the scene: The Royal Bank of Scotland is the largest of the three Scottish Banks, having over 50 per cent of the home market. It is the fifth largest clearing Bank in Britain, with more than 600 Scottish branches and, through its subsidiary Williams and Glyn, 315 in England and Wales. It is, for what such information is worth, also the 125th largest Bank in the world; no baby therefore.

Late last year the Royal Bank Board decided to seek 'a merger with a UK Bank with a strong overseas presence'. The ostensible reason was the Royal had been frustrated in its own efforts to expand abroad. Accordingly in March Standard Chartered, weak at home, strong overseas, made an agreed bid of £320 million for the Royal whose directors described the merger as 'a perfect fit'. They still use this expression.

The announcement of the bid aroused opposition in Scotland of a vigour that took the Royal's directors by surprise, such surprise being, on the most charitable reckoning, evidence of a certain naivety on their part. The next development discredited them still further, for in April the Hong Kong and Shanghai Bank, in defiance of the Bank of England's expressed wishes came forward with a £500 million bid. Having noted Scottish reaction to the Standard Chartered bid, the Hong Kong and Shanghai made loud noises about the Royal retaining a substantial degree of autonomy, and paraded its own Scottish connections.

Standard raised its offer to match Hong Kong's and on 1 May the matter was referred to the Monopolies Commission. Since then Standard has shown a belated tenderness towards Scottish susceptibilities, promising, for what it is worth, to maintain its British, domestic banking headquarters in Edinburgh.

The battle lines are drawn, but the really interesting questions hang in the air. First, why was the Royal so eager for a marriage?

Other reasons may have been more urgent than the Royal's wish to expand abroad. Fear is a sharper spur than ambition, and unquestionably the Royal's directors felt the hot breath of takeover wolves. Its largest shareholder, Lloyds with a 16.3 per cent stake, was one predator, rightly unattractive to the Royal's directors. Capture by Lloyds would offer few of the compensatory overseas advantages Standard Chartered promised while the Scottish directors, who have been reduced to a much humbler position in a Bank whose English component (Lloyds combined with Williams and Glyn) would have been so much stronger than its Scottish one. Nor were Lloyds alone in the hunt; the Deutsches Bank and Citibank were also sniffing round the fold.

How real these threats were is a matter of dispute. Lloyds is said to have been warned off by the Bank of England (though Royal directors deny any knowlege of this), while any foreign bid would certainly have encountered the same Bank of England opposition that has been directed at the Hong Kong and Shanghai; that is, the Bank's very proper objection to a British clearing Bank passing into the power of a Bank which is not, and can hardly be, supervised in London.

In these circumstances resolute Royal opposition to such a takeover would have been successful. However the directors turned instead to Standard Chartered, buying Lloyds' backing by a promise to sell them their 39 per cent holding in the finance house, Lloyds and Scottish. (Fortified by this promise, Lloyds then bought Lloyds and Scottish stock in the market and has gained control of the finance house, one Scottish casualty whatever the result of the main battle.) A second reason for the Royal's welcome of Standard Chartered may lie in its uneasy partnership with Williams and Glyn, the new marriage being seen therefore as a means of correcting the old.

Despite these considerations the case for the Standard merger remains a strong one. The fact that the original bid grossly understated the Royal's market value and the suspicion that Royal directors were showing more concern for themselves than for their shareholders do not in themselves invalidate the arguments for the deal. That the merger has the backing of the Bank of England will certainly count heavily (and properly) in its favour; in purely banking terms it indeed seems to be 'a perfect fit'.

Nevertheless there are objections.

First, the Royal brings more to the merger than it will receive. When a deal is as clearly to the advantage of one partner as this one is to Standard Chartered, it deserves scrutiny. The Royal will not only give Standard control of the fifth largest British Bank, but it will bring a liquidity which Standard lacks. Because of the nature of Standard's overseas holdings, tied up in African and Far Eastern countries which operate 'localisation' policies, it has lost the ability to move capital freely.

Consequently it has been described as 'an investment company holding Banking shares'. In these circumstances the suggestion that a much looser partnership would have been to the Royal's advantage is hard to resist. To have offered Standard Williams and Glyn in return for a substantial holding — say 25 per cent — in Standard would have given the Royal the entry to an overseas branch network which it conspicuously lacks, without the deleterious effects that may be feared from the proposed deal.

For — and this is the second objection — this merger will damage Scotland and Great Britain in general. It will mean the further concentration of financial power in London; who can want that? It will mean the removal of the power of ultimate decision from Edinburgh; is that desirable? The importance of Edinburgh as a financial centre may not be fully recognised in the myopic City of London; New York has no such doubts. Apart from its long history of innovation and recent examples of vision — Edinburgh financial interests recognised the promise of North Sea Oil long before London did — Edinburgh is now the third financial centre in Europe, behind only London and Zurich. That is something which should be expanded, not contracted. But a financial community depends for its vitality on a sensitive echo-system, like frogs in a pond; this can only be damaged if the largest frog is sold down the river.

And it should be stressed that it is in the British as well as the Scottish interest that Edinburgh should thrive. Has Britain benefited from the eclipse of Liverpool as a financial centre? The loss of the Royal Bank's independence would be the first shadow of a similar eclipse here too.

Realising this, many in Edinburgh now back the Hong Kong bid. Its promises of autonomy have a more authentic ring. Its minimal London presence arouses hopes that the Royal would be used as its European flagship. Its record elsewhere (in Vancouver for instance) lends credibility to the claim that it favours decentralised authority.

Nevertheless the dangers of a Hong Kong takeover are very great, and one cannot help feeling that many who back it do so principally to express their disapproval of the Royal's board. For a Hong Kong victory (and it will certainly win unless blocked by the Monopolies Commission or the Government) will breach the security fence which the Bank of England has erected round British Banks. It will therefore invite foreign Banks into the field. In England Lloyds and the Midland will become targets. Here it will certainly lead to a bid for the Bank of Scotland, which that Bank could probably only resist by inviting Barclay's, which holds 35 per cent of its shares, to take it over. (At the moment the Bank of Scotland and Barclay's have a gentleman's agreement that Barclay's will not increase its holding). That would mean the end of independent banking in Scotland, for the Clydesdale is already owned by the Midland.

Scottish interest demands rejection of both bids or at least would require the presentation of some new formula. One for Standard has been outlined above; the Hong Kong and Shanghai might be required to have its registered office in Edinburgh. This could be held to safeguard the Bank of England's position too. It is believed that the Scottish Office submission to the Commission recommends rejection; the Bank of Scotland's certainly does.

If Scottish interests alone were involved, we might expect them to be disregarded; but it is also in the British interest that Edinburgh remains a powerful and independent financial centre. Moreover, if the Bank of England is backing Standard Chartered, the Foreign Office is believed to support Hong Kong. In such circumstances the wise voice of Whitehall inaction may deem it most prudent to preserve the status quo.

If not, the harm may not be apparent in the short term. Guarantees will be given and observed for a time. But Scotland, with its experience of being a branch-line economy, and with its memory of like promises given to General Assurance Companies like Caledonian, North British and Mercantile, Scottish Union and National, all now defunct and ghostly names, will hardly trust in words. And we are not talking about the short term; a Bank is something durable, essential to the well-being of a community. The Royal has served Scotland since 1727, the Bank of Scotland since 1695. If they lose their independence, the domino effect will accelerate; what will protect the autonomy of investment trusts etc, as talent and vitality are drained away from Edinburgh?

The fact is that this sort of question cannot be dealt with as something narrowly technical and economic. It has to be viewed in a wider cultural context. (Hence my opening quotation.) Seen in that light the promised advantages fade away. No doubt it will be difficult for a Government wedded to the rhetoric of the free market to rule out either bid; nevertheless neither is in the public interest. Alternatively the Commission should require the bids to be restructured so as to permit the effective independence of the Royal to be assured. Of course such a requirement might deter either suitor. There would be little of value lost if it did.