UPDATE: RBS CEO: Banks Serve Public Interest, Grow Economy

13th Jul 2010 14:45

(Adds comment, detail, background.) By Marietta Cauchi and Patricia Kowsmann Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Royal Bank of Scotland Group PLC's (RBS) chief executive officer Tuesday said banks play an important role in helping the economy grow, and that while he accepted reforms were needed, any such changes should be appropriate. "The next set of reforms lie around making banks less likely to fail, less likely to trigger destabilising risk and better equipped to withstand it," said Stephen Hester, speaking at the British Bankers' Association's annual international banking conference. In particular, Hester said there was no case for separating banks between those that offer retail banking and those that engage in investment banking. Some regulators and politicians said banks that traded their own money while also advising customers and running retail banking contributed to the financial crisis. "What was emphatically not a common factor was the size, shape or diversity of failed banks. Nor was excessive speculating and proprietary trading activities," said Hester. In this context, Hester welcomed the U.K. government's plans to set up a Banking Commission as part of its broader reform proposals for the financial sector. The commission will have a year to report on issues such as whether to split up retail and investment banks. Hester said that banks have done a good job of serving the public providing products and services for retail and corporate clients alike. For example, RBS last year lent GBP40 billion to new businesses in the U.K. and still has GBP45 billion of credit facilities available and unused. During 2009 it also raised GBP186 billion in securities for corporate borrowers worldwide, as well as bidding for and distributing a similar amount of government bonds in new issues and auctions to help finance deficits in the last year. The wrong diagnosis would result in inappropriate reform, said Hester. For his part, Hester said that the key reforms that would address the real issues of bank failure center on the reduction of counterparty risk and, crucially, a U.S.-style Chapter 11 proceeding for banks. This would enable an orderly extension of losses to wholesale unsecured creditors so that "weekend recapitalisation is possible without state funding and all those so exposed know and accept the loss mechanism from the beginning," he said. Such a mechanism would also protect the everyday functioning of the institution, Hester added. -By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; [email protected] (END) Dow Jones Newswires July 13, 2010 09:45 ET (13:45 GMT)