DOUGLAS WOOD assesses the outlook for banks in a different climate

A year after the crash

After more than a year of turmoil in the banking sector there is still remarkably little change on the high streets. The branches are still there: RBS, Bank of Scotland, Abbey, Alliance & Leicester, Lloyds TSB, Dunfermline and so on. But rationalisation will come at some stage; the first sign likely to be the appearance of Santander livery where Abbey and Alliance & Leicester were before.
     What will happen to the Dunfermline Building Society, rescued by the Nationwide? The starting point was that the branches would continue as before, but the continuing position could depend on the strength of the Dunfermline brand. Nationwide may well have been preoccupied assimilating a number of unplanned acquisitions. Uncertain times must lie ahead though, as most Dunfermline Building Society branches will surely have a Nationwide footprint not far away.
     And what of Bank of Scotland? Last autumn there was considerable shock that it was to disappear so suddenly after a history stretching back 300 years. There was a feeling of collective loss. But a year later, out on the high street, nothing much has changed; Bank of Scotland is still there and, if anything, likely to increase its presence as Lloyds TSB and Bank of Scotland branches rationalise under the Bank of Scotland banner.
     A year ago there was some comment that the merger with Halifax in 2001 was the beginning of the end for the Bank of Scotland, and in a sense it was; but even more so it became the beginning of the end for the Halifax. At the time of the merger, Halifax was the larger partner, Halifax bosses took the key positions in HBOS and the new group's headquarters came within a whisker of being located south of the border. However, events subsequently took a different turn. In 2007, Bank of Scotland became a different entity under a restructuring that created Bank of Scotland plc as the single banking division of HBOS, thus spelling the end of the road for Halifax plc. From that point it would seem that Halifax has been continuing only as a brand. When HBOS was taken over by Lloyds, Halifax plc had already gone. Scotland's loss is the prestige and business activity associated with the headquarters of a major company. To a point, Bank of Scotland lives on as before: a discrete plc now within a bigger parent group and the main brand of Lloyds Banking Group in Scotland.
     The focus is now on what structure the wider banking sector should take in the future. Changes will be made to the regulatory framework, whether it becomes more stringent or merely different. Whatever the new regime, it cannot guarantee that banks will never run into difficulties again. There are always some for whom risk management becomes strategic non-compliance. It is hard to believe, but RBS had assets and liabilities bigger than the GDP of the UK. That is the prime reason for the need to reconcile two fundamental issues. Firstly, high-street banking operations that interact with the general public cannot be allowed to fail; and secondly, public funds cannot be used to underwrite investment banking and the complex territory that lies beyond. The bonus culture is re-emerging, if it ever went away. Risk and reward must be proportionate and aligned. The risk-takers should understand that when things go wrong they may find the only exit route is through the trap-door that ended Lehman Brothers. Management and shareholders will be in it together.
     Significant changes seem inevitable before long. Bank of Scotland could yet emerge once more as something different.