Page last updated at 00:11 GMT, Monday, 12 October 2009 01:11 UK

Clearing up the mess: One year on

By Douglas Fraser
BBC Scotland business editor

Sir Fred Goodwin
Sir Fred stood down as RBS chief executive after the bank bail-out

Sir Fred Goodwin said it looked more like a drive-by shooting than a negotiation, as the bank he then headed was told it needed £20bn of capital injected by the government.

That was exactly a year ago, and Sir Fred, with his infamous pension, has since become one of the most vilified of the world's vilified bankers.

Under new leadership, the Royal Bank of Scotland has been reducing its balance sheet, down from £2.2 trillion, while starting to write down billions of pounds in risky assets.

Meanwhile, Halifax Bank of Scotland has been going through the pain of a merger with Lloyds TSB.

Through the past year, the risks taken on by Bank of Scotland corporate division have become clearer, and more astonishing.

Sir Peter Burt, who had steered Bank of Scotland into a merger with the Halifax, is reported as saying the state of the group he left in 2003 was "like one of those teenage parties where the parents go out and find the house has been trashed".

Huge bill

A year on, how are they getting on with clearing up the mess?

Scotland's banks and Britain's banking sector now look safe, which is no mean achievement, given the state they were in this time last year.

The price of that starts with the bailout announced last October, totalling £37bn.

But of course, the price is far higher.

Nearly £600bn has been identified as the at-risk assets in RBS and Lloyds Banking Group (now including HBOS) which are need of insurance by the UK government.

And the International Monetary Fund reckons Britain's banks have only worked through 40% of their damaged assets, so there's lots more yet to be revealed.

Job Centre
Unemployment has continued to rise in Scotland with 187,000 now out of work

The knock-on effects on the rest of the economy are all too clear.

The loss of confidence, and the shortage of bank credit pitched the economy into a steep recession.

Unemployment continues to rise, while leaving a huge bill that's now moving on to cast a giant shadow over the future of public services.

Controversy continues to rage over the costs banks are imposing on the wider economy, as they use their market domination to ramp up charges for their services.

There is resentment across the economy that the banks have benefited from the bail-out, but don't seem committed to helping others facing their own crises.

The counter-argument is that banks are being told to price risk more realistically than they did.

With higher capital balances required, they are being told to be more prudent than they were.

It is clear that there are major changes on the way

And both individuals and businesses are now at much higher risk of default than they were through the boom years.

It may also be - though it's hard to prove - that the banks' lending figures are down because there is less demand for credit.

In household budgets, as in firms, many are choosing to reduce debts rather than take new ones on.

What lies ahead for RBS and Lloyds, and soon, is a decision by European Commissioner Neelie Kroes on changes she will require as part of her approval for the UK government's support for them.

She's already wielded that power with German banks. And there is extensive speculation about what she's going to to Britain's.

A key element is the extent to which they will be required to reduce their market domination, with Lloyds having more than 30% of both the current account and the mortgage market.

RBS's dominance is primarily in business lending. Taken together, they are particularly dominant in Scotland.

Neelie Kroes
Neelie Kroes is the EU's competition commissioner

The European Commission could tell the banks to scale back the number of customers, or to sell off some of their businesses.

Scottish Widows, now part of Lloyds, has been suggested as one such asset.

But then, Lloyds seems to think it could avoid the Asset Protection Scheme and its associated conditions by appealing to its shareholders to participate in a gigantic rights issue, reported to be in the region of £15bn.

While the state aid rules require the UK government to represent the banks' interests in negotiating with the commissioner in Brussels, the chancellor, Alistair Darling, used a BBC Scotland interview to reassure that the changes will not scatter the banks to the four winds, and nor will the changes be instant.

But it is clear that there are major changes on the way, and the government will have to start planning on how and when it sheds its share in RBS and Lloyds.

One forecast for the future of banking is that it ought to become less risky and a lot more boring. That clearly hasn't happened yet.

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