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Rebuilding Banking: transcript of Stephen Hester's speech to LSE

On 1st October 2012 Stephen Hester gave an address, entitled "Rebuilding Banking", as part of the London School of Economics public lecture series. What follows is the transcript:

Good evening. Thank you for that introduction and thanks as well to the London School of Economics for the invitation to speak here tonight.

Right at the start I want to get something out of the way. 

What I want to acknowledge is that many of you will have entered this theatre tonight with cynicism about what I might say. After all, you have witnessed the banking industry confront an ever worsening array of scandals over the past few months. And you have witnessed me and my peers make comments on the need to ‘fix the culture’ of our sector, to lead ‘ethical reforms’ of our industry without as yet offering much in the way of solutions or concrete actions. And you may suspect that such statements are the creation of PR departments rather than the genuine reflections of banking leaders.

So here at the beginning of my remarks, I want to say that if you do harbour such sceptical thoughts, I don’t blame you. I know banks - mine included - have given you many reasons to doubt our motives.

But while I understand that scepticism, I also want to challenge it. 

Banking matters. And while suspicion and distrust have been a feature of our relationship with finance for thousands of years, the current level of anger is, in my view, unhealthy. 

I have come here tonight to speak about what has gone wrong in my industry and what I think needs to be done to fix it. I want to speak to you about why I think banks have made the mistakes they have, talk about what we have done to make things better, but also to outline those areas where we need to do better still. I will outline some ideas for the next wave of change, but I will also freely admit that I do not have all the answers.

Throughout my comments, I will work to openly address the criticisms that are levelled at me and my peers when we speak on topics like culture and reform. I do not want the elephants in the room left unacknowledged.

What I hope I can do is demonstrate that I understand that banks can not afford to ignore debates we find uncomfortable. And I hope that at least some of you can leave here tonight thinking that as banks face this moment of significant reputational strain, there just might be an opportunity for meaningful, constructive change; a change that will benefit the customers of banks and by extension our economy and society.

And if I do not address your concerns and doubts I will leave plenty of time for you to challenge me with questions.

So let’s get started.

Where we are now

Given the standards of recent years, it certainly says something that 2012 could be in the running for the title of annus horribils for the banking sector. 

This summer saw over a dozen major banks, including RBS drawn into the LIBOR rate fixing-scandal. Even banks that had sidestepped the spotlight over the last few years have found themselves drawn into intense regulatory scrutiny on money laundering rules. At the bank I lead a systems failure has raised worrying questions about the reliability of information technology across the sector. And we face not one, but two major regulatory processes on the misselling of financial products to our customers.

There is a sense of rolling, sustained crisis. A sense that the industry cannot get things right. A sense that four years on from the collapse of Lehman Brothers and the rescue of large banks around the world, that we just haven’t made any progress in regaining the trust of the public.

There are two important observations that need to be made about this widely held impression of where we are. The first is that the impression of zero progress is wrong - I believe very wrong. But the second is that as difficult as this moment is for banks, that we are going through a challenge to our culture that is unavoidable and will prove ultimately to be positive.

Let me expand on both of these, turning first to this allegation that banks have somehow wasted the last four years. I know that when we are confronted with scandal after scandal it is hard to imagine that progress in repairing the industry and in regaining the trust of the public has been made. But very substantial progress has indeed been secured.

We have to remind ourselves that just a few years ago, the question of trust was not "will banks do the right thing?," but instead "will they keep my money safe?" Just five years ago our TV screens and newspapers were filled with images of people queuing outside branches of Northern Rock. Just four years ago senior members of the Government worried that cash machines at RBS would run dry. Through much of 2009 global financial markets were riddled with paranoia and panic as rumours about hidden troubles could send the shares of seemingly reputable institutions tumbling by double digit percentages in the space of an hour.

The news of the past few months has been very difficult, but this is not 2008. We must keep perspective.

Look just at the bank I lead for evidence of how far we have come.

At its worst point, RBS had a loan to deposit ratio of 154%. At our most recent results that figure stood at 104%. We have nearly reached a £1 in loans for every £1 in deposits we hold - the golden rule of banking - and we have done that while expanding our support for UK Retail and Corporate customers.

At its worst point, RBS core tier 1 capital - which was not even formally disclosed at the time - fell to just 4 per cent of the assets we held. Today, that stands at 11.1 percent.

At RBS our funded balance sheet has reduced by £634 billion while still enabling us to increase support for UK customers.

Our leverage ratio has fallen from 28.7x to 15.6x.

We have fully repaid government emergency liquidity assistance and have recently announced our exit from the Government’s Asset Protection Scheme without ever having made a claim on Government assistance. 

Our reduction of our non-core assets - from those businesses we can no longer afford to be in or never should have been in in the first place - is ahead of schedule.

RBS, like the rest of the banking sector, still faces significant uncertainty and challenge. But today we face that challenge with a financial strength that many people would have thought inconceivable just 3 1/2 years ago when I launched our turnaround plan.

And without trying to downplay the level of anger and distrust that still exists, we need to keep that in perspective. As we sit here tonight, I believe that the public does sense that the safety and soundness of the financial system - especially of British banks - has improved significantly. I believe that while they may have lingering concerns, that our customers appreciate the sense of conservatism and sobriety that is being restored in our industry.

And this improvement in confidence should not be overlooked as we discuss the path through the current scandals that are plaguing the industry. In evaluating which elements of distrust were most urgent to address, I do not think anyone would disagree that restoring faith in the basic solvency of banks like RBS had to be priority number one.

We have placed RBS on a much more secure financial footing. We have worked hard to remove the threat to the UK economy that was posed by the bank’s overly large and leveraged balance sheet.

But let’s be clear. The level of distrust and anger is still too high and addressing that will not just be a financial matter. Our customers and the wider public want to know not just that banks can keep their money safe. They want to know that we will do the right thing by them.

And at this moment, after a summer of growing scandal, it is clear that addressing mistrust on these elements has moved up the priority queue. And I believe that as we address these elements, we have a real opportunity to improve the way banks do business. 

How to proceed

So, what is the path forward? How do we make sense of the raft of issues plaguing the banking industry?

For me what is clear is that while banks have made a variety of mistakes, there is a common cause that sits behind the different scandals we are confronting.

Over the last 20 years, banks became very confident. They began to believe too much in their own wisdom. They began to believe that their right to exist was absolute.

And in the process they lost sight of the basic truth about what makes a good company. Really good companies perform well for their owners, regulators, employees and communities if above all else they serve their customers well. You can have a number of different goals for your company, but at the core great businesses are driven by their customers’ priorities – by their customers’ values, goals and needs – and not by their own.

It may seem incredible to you that any company needs to be reminded of this. And I should be clear that at RBS, the vast majority of our staff are focused very squarely on doing a good job for their customers.

But it is clear to me that I have to do more to nourish the very real care for our customers that exists in RBS. And I have to do more to make sure everyone who works in our bank walks through the door everyday with the customer completely front of mind.

Now of course we have an important job to do in addressing the individual issues on our agenda over the next few months. When we reach conclusion on the various investigations we are dealing with – from LIBOR to anti-money laundering and into the systems failure at RBS over the summer – I intend to leave people with no doubt about how seriously we take these issues. We are squarely focused on demonstrating accountability and reforming our processes.

The point I am making, however, is that we must do more than treat symptoms. We have to address the root cause of the industry’s failings. And that, for me, is very clearly the lack of focus on the customer in our collective cultural DNA.

An industry that truly puts customers first would not have seen interest rates that affected our customers rigged for the benefit of traders and in some instances banks themselves.

An industry that truly puts the values of its customers first would not entertain manipulating loopholes in the law to get around sanctions regimes.

And in the case of RBS I have to admit that a bank that was doggedly focused on its customers would not have allowed our fundamental reliability to be questioned the way it was this summer.

Now, I need to return again to those silent criticisms that may be swirling in the room.

I am sure some of you are thinking, ‘Great, another banker with empty words on customers and culture’. And I’m sure some of the journalists in the room are planning on writing just that for tomorrow’s papers.

And to that criticism I have two things to say.

First, since 2009 RBS has already made progress in becoming more customer-focused.

  • I made improving support for our customers the top goal of my strategic plan 3 ½ years ago
  • The service offerings across all of our retail and corporate divisions have been overhauled to be explicitly customer-driven
  • We are undertaking a major reform to the way we evaluate risks and strategy so that our ability to be there for our customers cannot be questioned in the future
  • We have reformed the way we pay our staff so that customer satisfaction and risk control rather than just profit determine whether or not you get a bonus and how big that might be
  • In our investment bank we have pulled out of markets and businesses that were not connected to the priorities of the large corporate and institutional customers we serve
  • And even as we undertook the largest corporate restructuring in history with a xbn cut to our balance sheet, we have refused to allow any cuts to our support for core UK Corporate and Retail customers

The second thing I should say about the criticism of ‘empty talk’, however, is that I agree. There is no question that we have to do much more. The changes I just outlined have been important, but much of it has focused on consolidating the existing cultural strength present in our bank and taking care of what might be called ‘hygiene issues’ in areas of weakness.

If banks hope to ever be considered great companies again, the work to strengthen our customer culture has to be demanding, stretching, and continuous.

That is why my colleagues and I at RBS have begun a review of our corporate purpose and values. And before you roll your eyes about fluffy vision statements, let me reassure you we are already working on concrete steps to give life to our refreshed purpose and values. The overall goal will be to put customer interest at the heart of all decision making.

We are looking to build on a number of the things we have already implemented and piloted since our strategic plan was launched in 2009.

Some of the things currently under consideration are:

  • New public charters for the customers of every business unit which will outline exactly what we will offer and how we will conduct ourselves. These charters will be embedded in assessment, training, and pay policies for all of our employees. This will include reform of our long-term incentive programmes, deferral and clawback procedures that have been at the centre of the bonus debates in recent years. We already have some experience with charters and will now be looking to expand and entrench them throughout our business. For example we are looking at formal mechanisms to allow relevant third sector organisations such as consumer groups to scrutinise our delivery of these charters
  • We are also considering greater use of formal accreditation schemes for front-line staff who deal directly with our customers. We have already done this in our corporate bank where we have sought to restore the place of the professional banker. We now need to take this further.
  • I want to implement regular reviews of incentive schemes for front-line staff to ensure that evolving customer needs remain the top performance metric for our people. We have made significant improvements to shift the emphasis from sales to service in how we motivate staff. But we need to keep asking ourselves if the balance is right. We need to make sure staff never feel pressured to push products that are not in the interest of our customers
  • We are proposing a new Code of Values for RBS that would be signed by every current employee and every new employee when they join. This would replace the somewhat bureaucratic and complex code of conduct we currently have with a very clear set of principles that cannot be misunderstood or misinterpreted. It would be supported by regular training for staff
  • We are exploring programmes to encourage ‘whistle blowing’ when members of staff are concerned that their business areas are failing in our commitments to customers. These programmes would be backed by formal reporting and accountability procedures.
  • We will commission a third-party led review of our lending practices to focus on some of the ethical concerns that still cause doubts for our customers and could undermine our purpose and values. While I do not expect to make all interested parties happy, there is no reason we cannot have our debate on lending policies in a more open and frank manner
  • And perhaps most importantly we are considering building on the progress that our Chairman Sir Philip Hampton and our Board have made in improving corporate governance at RBS. It may be necessary to give the Board more tools to scrutinise our customer commitments and the performance and development of our employees

Now there are some things we could do that would be seen as popular cultural reforms that I just do not agree with. Scrapping bonuses and incentive pay would probably earn me a standing ovation at the end of this speech. But beyond being commercially very difficult, I also continue to believe that performance-based pay has a place in our industry. We need to continue to get the balance right. There should never be rewards for failure. Bonus schemes should never encourage excessive risk taking or aggressive product marketing. But good performance should be more highly rewarded than poor performance.

The steps I have outlined here are still in the development stage. And I accept that there will still be more needed. But at the very least I hope they demonstrate that at RBS we intend to do more than just talk about improving our culture. We are serious about taking real action to ensure that our commitment to customers drives everything about our business.


One of the things I’ve had to adjust to in the last 4 years is the huge amount of public interest in what we do and how we do it. A CEO expects to be in dialogue with their customers and investors. What’s now clear in my job is that I as a CEO and RBS as a bank actually need to be in dialogue with the nation. The public have higher expectations of us in the reform agenda than any other bank. It’s taken me and my colleagues a while to get used to that but we have come to realise that the almost unique accountability it brings is borne of a public desire for a different RBS to emerge. People want us to be financially successfully again – but not at any expense and certainly not at their expense.

We have tried to lead the way by being more open in our public disclosures and more accessible in our communication style. In the early years of our recovery plan we have focused on restoring safety and soundness to RBS, thus reducing the risk we posed to financial stability and we probably saw this as the best thing we could do for the country. But the dialogue with the public is as intense as ever. And the relief that we are out of intensive care has given way quickly to a conversation about what sort of bank we will be come. Are we on the side of our customers? And are we going to keep changing and reforming until people believe we can make a positive difference to their lives and the prosperity of the country?. The answer to all of those questions is yes.

I am confident we can now build on our progress to this point. A strong, safe balance sheet together with a single customer-centred culture will be the pillars of our future success and ultimately help us win back the thing that our industry rests on and needs to win back – trust. 

We know what we have to do, although we don’t have all the answers. In that spirit I look forward to your questions and the debate.

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