Sunday Herald business comment
August 10, 2008
business comment from Owen Kelly, chief executive of SFE, for the Sunday Herald, 10 August 2008 The only way to ride out a credit crunch is to trust our banks SCOTLAND IS an open trading economy. That is a good thing in itself if, like me, you believe in the power of fair competition in free markets. Trade liberates and empowers. It is therefore no coincidence that in an economy such as ours, the financial services industry is one of our largest and most successful. It is the most internationalised of industries and it works across boundaries of all kinds. But some are saying that the credit crunch proves the very opposite - that markets need a lot more regulation, to guard consumers (and presumably investors, however well informed) against the excesses of financiers. While it is understandable that specific aspects of UK regulation are reviewed - particularly in the light of the unprecedented situation we recently saw when public funding was needed to support Northern Rock - I believe that governments, co-operating internationally, need to set as limited a framework as possible to allow competition in financial services to thrive. The more governments are involved, the more markets can be distorted. A legacy of that kind is arguably what we are seeing in the US with Fannie Mae and Freddie Mac. One of the Scottish financial services industry's enduring strengths in this open, international trading environment is its diversity. Our banks (more on them later) have always been central to Scotland's success in financial services, and they still are. But they are nothing like the full story. For example, Standard Life, one of the world's major life and pensions companies as well as one of Scotland's best-known names, announced some very good half-year results in the face of very tough market conditions (as did Scottish Widows). And in passing, I noted that Standard Life's Asia business grew by 46% - a perfect illustration of a Scottish company taking advantage of globalisation. Other sectors of the industry, like fund management and asset servicing, continue to prosper and to look for growth opportunities. In recent years, some of the biggest names in financial services, such as JP Morgan, Morgan Stanley, BNP Paribas, State Street and Citi, have set up operations in Scotland, taking advantage of our skills and our business infrastructure. But the banks are in the spotlight and let's confront head on the questions that have been raised by some commentators about the performance of our two largest, RBS and HBOS. Both companies have been outstandingly successful in recent years and while they are different companies, with different strategies in different markets, they have in common deep roots in Scotland, its culture and its economy. The credit crunch has bitten them, as it has their competitors; but by going to the market to secure their capital base, they have done precisely the right thing and shown a lead in very challenging international market conditions. A senior economist reminded me the other day that £1 billion of lending capacity at a bank is worth £13bn to the real economy, because of their capacity to multiply its value through management of lending and investing processes. So capital resources in our banks are important to our economy and more perceptive commentators have given due credit to these two banks for taking such bold action, so quickly. And they are our two biggest payers of corporation tax, so we all benefit from their continued success. RBS announced a loss this week but it was much less than many of the more breathless headlines had anticipated. In reality, the main hit to the group came in April when it showed leadership in global credit markets by writing down nearly £6bn from its balance sheet. It also successfully completed a painful rights issue and is making headway in asset sales. It is now one of the best capitalised banks in the world. And the results from RBS's UK high-street banking businesses, representing our daily bread in the Scottish economy, continued to grow at a healthy pace. This accords with what I hear from other banks in Scotland. They are very much open for business as lenders, where the business case is sound. And this makes a crucial point. As commentators rush to judgement at potential losses and what they mean for the state of Scotland, they ignore the fact that the credit market loss reflects global conditions, not local ones. Yes, it is bad for Scotland if our biggest company makes a loss but it would be worse if they hadn't faced it and dealt with it as they have. But however reassuring it is to look at how individual companies are responding to market conditions, a larger question remains about how financial services are now perceived by customers, investors and other sectors of the economy. Companies and regulators are now moving quickly to learn from what has happened. Rebuilding confidence, across the board, is likely to occupy us for some time to come. That is an urgent task; but in the meantime, let's not lose sight of the skills and experience that Scotland's financial services industry has built up over the last 300 years. They are the envy of our international competitors and will remain so, I believe, for many years to come. BUSINESS COMMENT By Owen Kelly
