In a significant turn of events for the UK banking sector, the Treasury has completed the divestiture of its final shares in the NatWest Group, thereby marking the transformation of this bank into a fully privately-owned entity, approximately 17 years after a dramatic bail-out during the financial crisis of 2008. This development signals the end of a challenging chapter in British banking history, characterized by significant interventions to salvage a collapsing financial system.
The crisis that necessitated such interventions began in the early hours of October 13, 2008. Chancellor Alistair Darling was leading a team of officials who were strategizing on the largest state intervention in the private sector since World War II, surrounded by takeout food as they mapped out the rescue plan. The following day, Darling announced a scheme that ultimately would burden UK taxpayers with costs exceeding an entire year’s defence budget—around £45 billion at the time, reflecting a staggering £73 billion in today’s terms. This state intervention led to the acquisition of an 84% stake in the Royal Bank of Scotland (RBS), which has since been rebranded as part of the NatWest Group.
RBS was considered too large and too integrated into the financial infrastructure of the UK economy to fail. Its assets exceeded the size of the entire UK economy—an unsustainable situation that, had it collapsed, might have wreaked havoc on financial stability. Notably, the key question is why the Treasury took nearly two decades to fully sell off its stake in what became emblematic of banking recklessness at the time. Furthermore, amidst the emergence of different risks in the financial domain, particularly cyber threats that threaten the stability of banking operations, concerns loom regarding the resilience of UK banks against potential future crises.
Rick Haythornthwaite, the current chairman of the NatWest Group, expressed profound gratitude towards the taxpayers for their role in stabilizing the bank back in 2008, acknowledging that their intervention safeguarded countless businesses, homeowners, and savings accounts. Significant changes have transpired since then—around £1.5 trillion in outstanding loans has been eliminated, tens of thousands of jobs cut, and about £10 billion of taxpayer money remains unrecovered.
Former senior government adviser Baroness Shriti Vadera emphasized the distinction between the government’s financial commitment and typical investments, pointing out that nationalizing RBS was a rescue mission rather than an investment opportunity. The priority was safeguarding the economy rather than bailing out an individual bank. The panic surrounding the banking sector was palpable, with then-Prime Minister Gordon Brown discussing extreme measures to maintain public order should the banking system collapse.
While RBS was the most prominent bank in the spotlight, other financial institutions were also on the brink, intertwined in a global crisis ignited by risky mortgage loans in the U.S. housing market. The complexities of bad loans created a ripple effect, leading to widespread distrust among banks, culminating in a cessation of lending and accentuating the crisis.
Surprisingly, following the government’s stake in RBS, the stakes in another major bank, Lloyds, were sold in 2017 for a profit, contrasted starkly by the prolonged ownership of RBS shares. This delay sparked discussions about whether the government should have divested from RBS much sooner to mitigate ongoing losses. Various complicating factors, including legal ramifications stemming from RBS’s American operations and persistent losses, impeded earlier selling efforts.
Andrew Bailey, Governor of the Bank of England, asserts current banks are in a much stronger position compared to 2008, a development that proponents believe mitigates the risk of taxpayer-funded bailouts in potential future crises. Enhanced regulations and stress testings root concern for financial stability that beleaguered the industry in the past, projecting a cautious yet hopeful view of the future—a snapshot indicative of conscientious evolution in the understanding of financial risks.
However, as the banking landscape has changed, new vulnerabilities have emerged, most notably in cyber threats. Recent high-profile cyberattacks targeting major retailers have raised alarms about the banking system’s vulnerability, underlining that, while banks are more robust today, the potential for crises remains intrinsic to their interconnected nature in the economy. The fundamental functionalities of banks as credit systems, economic arteries, remain unchanged—a lesson driven home by recent events both domestically and internationally in the banking sector.