Bill Jamieson: Minnows will flourish when big fish rots from the head

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Bill Jamieson looks at prospects for Edinburgh after RBS and sees small firms leading the long, painful march to recovery

Imagine the scene three years from now. In St Andrew Square, the gloom of winter is dispelled as lights blaze across the garden from one office in particular. On one side of St Andrew Square, there is a bustle of activity not seen for years. For No 36 has been restored to its former glory – as the new headquarters of the slimmed-down, “cut-to-fit” Royal Bank of Scotland.

The return of No 36 to its former purpose might have seemed just a few years ago a humiliating retreat, a massively retrograde step to “wee sma’” bank of yesteryear.

Instead, it was universally hailed as confirmation of a Lazarus-like return to health. Shareholders, investors, customers and the financial press greeted the move as the final outward and visible sign of a return to financial sanity.

When the First Minister cut the ribbon to mark the return of RBS top management to the square, more than 500 attended a glittering gala reception. Eddie Reader sang the best of Burns and Nicola Benedetti performed with stunning coloratura. How Edinburgh applauded.

The bank, of course, is much altered from the one that foundered in the global crisis of 2007-08. Gone are the grand pretensions of a continent-striding colossus. Its investment banking and global markets divisions have been savagely shorn.

And when that was complete, the grand corporate campus at Gogarburn seemed so out of place, irrelevant, and for many, worse: a sinister, unwanted ghost from the past. Not that many much cared for its architecture: it was like a concrete block call centre hyped up on a drip-feed of muscular steroids, its wings bulging like some ghastly, cement-filled Lilo. The press release announcing its sale to a small-firm business park consortium confined its description of the building to one word – the most condescending of all put-downs in the Edinburgh vernacular: “inappropriate”.

For what grandeur did Gogarburn ever represent, given that almost all investment banking was conducted in London? In the two years 2009-11, RBS more than halved its outsized balance sheet and pulled out of 12 countries. Between 2007 and 2011, headcount fell from 24,000 to around 19,000 – with another 4000 jobs destined to disappear in the following two years.

So: Gogarburn sold off, the change management of the Hester era replaced by new figures for a new era, the corporate signature and logos downsized and the footprint of the bank brought back to a human, comprehensible, scale.

Those who hailed the convulsive change of the 2008-2014 era – seven biblical years in a pulverising shrink machine – as the forging of a new bank for a chastised and blood-drained economy – quite missed the point. This was not the forging of a new style in Scots banking, but the painful return to the values, purpose, mission and style of a banking culture that had not just served Scotland well but had made that culture the envy of the world. When we lost it, we lost the banking plot.

Looking out at the end of 2011, that change – though nowhere near as dramatic – can be felt right across the Edinburgh banking scene. Fortunately for the city, the really bruising losses in staff were suffered in London and overseas. But for years RBS and its Lloyds Banking Group were the biggest private sector employers in Scotland’s capital and accounted for the bulk of 50,000 banking jobs across Scotland as a whole.

What is changing is not just the quantum of these banks as employers but a profound shift away from the global banking fever that swept through the financial world in the preceding 25 years. This is no temporary cyclical reversal but the end of a dysfunctional era.

Small-scale boutique investment banks are likely to emerge while “bricks-and-mortar” branch banking will shrink at a faster pace. A cash-strapped Edinburgh city council can no longer count on an expanding banking sector for ever rising rates income and as an indiscriminate funder of commercial development. Derelict sites are likely to scar the city for years.

And while the city economy showed considerable resilience in the “phoney recovery” of 2009-10, the outlook looks much more daunting as a second recession looms. Its strategy team has rightly diagnosed that the city needs new growth areas. For now it faces a double challenge: the absence of growth in banking employment on anything like the scale enjoyed a decade ago; and public sector job losses estimated to hit at least 4000 across the city by 2014-15.

Between 1998 and 2008, the financial services and businesses sectors together accounted for 64 per cent of output growth in Edinburgh. That is now at Dead Slow Ahead. And the public sector jobs growth over the same period was 24 per cent – now “Reverse All Engines”.

Scotland’s capital has much in the banking sector counter revolution to be thankful for. But it has left a massive challenge for the city in finding innovative new industries for growth. Those new small firms in Gogarburn will be our best hope for the future.

LOW EXPOSURE

Chancellor George Osborne, in response to the Independent Commission on Banking (ICB) proposals, said yesterday that the Royal Bank of Scotland (RBS) should “make further significant reductions in the investment bank”.

“We believe RBS’s future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking,” said the Chancellor, before adding that RBS would have to scale back its “riskier activities that are heavy users of capital or funding”.

The Chancellor admitted that while the government had spent £45.5 billion bailing out the bank, the investment was now worth just £27bn. He told MPs of the huge loss as RBS was cut down to size in the biggest shake-up of UK banks for a generation.