Banks urged to 'serve Scotland's economy'

RBS and HBOS, now part of Lloyds, were bailed out by the UK government

Failing banks should never again be able to "hold a gun" to the heads of taxpayers in Scotland, according to a report from MSPs.

Holyrood's economy, energy and tourism committee called for the country's banks to "serve the economy".

The report followed an inquiry into the impact of the global financial crisis.

It urged banks to return to "Scottish principles of financial rectitude", stop aggressive marketing and improve their corporate governance.

The committee also called for the Office of Fair Trading to investigate competition in personal current accounts, home loans and business banking.

MSPs warned that action was needed to avoid a repeat of the financial crisis which led to the near-collapse of Scotland's biggest banks, but said "the cost of the financial crisis and the ensuing recession will be a bitter legacy for years to come".

Banks are there to serve the economy. It is not for the economy to serve the banks Iain Smith MSP Committee convener

The report stated: "Individual banks can never again be allowed to be so important that their failure can endanger the real economy of a country.

"Never again can banks and the financial sector be able to hold a gun to the collective heads of the taxpayer where the consequences of their failure are too terrible to imagine."

Committee convener Iain Smith MSP said: "Banks are there to serve the economy. It is not for the economy to serve the banks.

"It's important that the Scottish government has a clear strategy for the type of banking sector Scotland needed to meet the needs of individuals, businesses, communities and the wider economy."

Crisis legacy

He added: "The legacy of the crisis must be managed to ensure it never happens again.

"A sustainable financial services industry that supports the rest of the Scottish economy must be developed."

The banks' regulator is criticised for failing to oversee banks outside London, with the worst financial failures in Scotland, Newcastle and Yorkshire.

MSPs said there should be more competition in future, with banks constrained in the risks they can take.

That would mean shrinking or breaking up RBS, although MSPs also want its Edinburgh headquarters role to be protected.

'Shock and dismay'

The report's recommendations include a call for the Scottish government to have a clearly developed vision for the financial sector, including the role of Lloyds Banking Group, which now owns HBOS, and Royal Bank of Scotland.

The committee said it recalled the "profound feeling of shock and dismay" when Scotland's two major banks failed in 2008 and had to be bailed out by the UK government.

"The severity of the situation should not be underplayed, nor should the potential consequences of not rescuing these banks be forgotten," it added.

However, the report emphasised that other parts of the Scottish financial sector withstood the crisis, and a thriving life insurance, pensions, investment management and asset servicing sector employs thousands of people.