By Anthony Faiola and Mary Jordan
Washington Post Staff Writers
Saturday, March 28, 2009
EDINBURGH, Scotland -- Once as rooted in the Scottish soil as this city's famous castle, the Royal Bank of Scotland ventured far during the era of globalization -- pumping billions of dollars worth of credit overseas as it expanded into markets as diverse as Kazakhstan, China and Rhode Island.
But just as RBS came to symbolize the free flow of credit across borders, the worldwide financial crisis has turned it into a leading example of the reverse: protectionism in the 21st century.
The government took majority control of the venerable bank four months ago after it suffered the worst corporate loss in British history. Authorities promptly issued a fresh directive: RBS, which had been in private hands since 1727, would have to sharply boost lending to British companies and home buyers stung by the global credit crunch -- effectively curtailing lending to its equally hard-hit customers overseas. As RBS prepares to comply with the government order to pump billions of dollars more into British credit markets, it is retrenching in at least 15 countries, moving to sell off branches from Vietnam to Romania.
In the United States, where RBS operates the nation's 10th largest bank, the company recently sold off 65 subsidiary branches in Indiana and scaled back auto loan operations in Texas, Colorado, Oklahoma and Arizona.
World leaders gathering for a major economic summit in London next week are vowing not to repeat the trade wars of the 1930s by imposing the kind of protectionist tariffs on butter, steel and other goods that deepened the Great Depression. But while their promises center largely on avoiding classic forms of trade barriers -- such as higher taxes on imported cars -- the rise of financial protectionism poses a far greater threat to global recovery.
In exchange for billions in taxpayer dollars to save major banks, some governments are requiring banks to boost lending at home.
Some experts say such political responses to public fury at financial institutions could hurt developing countries and roll back the globalization of finance that helped propel world growth over the past decade. Other experts, however, have criticized RBS and similar institutions for spreading too far, arguing that banks are most productive when they lend in familiar, home markets.
In Paris on Friday, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, decried the strings attached to bailouts as a new "kind of back-door protectionism."
"The big banks [are] coming from developed countries and repatriating capital," he said, saying such actions were "drying up" credit in emerging markets. "We have to fight against this."
Government pressure to lend domestically, analysts say, is contributing to a broader withdrawal of credit and capital out of emerging markets.
Large Western banks desperate to boost their balance sheets, in part to respond to government edicts that they do so, increasingly are avoiding making loans that carry even the slightest risk.
That is leaving a void in some emerging markets where lending has come to a virtual standstill. And that void is making it harder for millions of people in the developing world to run businesses, buy homes and pay for education.
The IMF and other international lenders are under enormous pressure to fill the gap. This week, President Obama and the leaders of more than 20 nations are set to back a deal to at least double the amount the IMF lends to a growing list of troubled nations.
Some officials worry that, with governments increasingly involved in the financial sector, the next generation of banks may be smaller, more streamlined and more domestically focused than those that have recently fallen into distress.
"The future of globalization is at stake here," said Stephen Timms, a member of Parliament and leading government spokesman for the Treasury. He said Britain has "been on the receiving end" of financial protectionism, as troubled banks in Iceland and Ireland have stopped lending in Britain. Globalized financial services lifted people in poorer countries out of poverty, he said, "and we don't want to go backwards."
In Britain, two major banks now majority-owned by the government -- RBS and Lloyds -- are being told to increase lending at home, each by $36 billion a year for the next two years. In the Netherlands, the Dutch government has directed bailed-out financial behemoth ING Barings to pump an additional $33.2 billion into the local credit markets this year alone. And George Provopoulos, the governor of the Greek Central Bank, has warned Greek banks against using funds from a $28 billion government assistance program to prop up their subsidiaries in hard-hit Eastern Europe.
Elsewhere around the world, the pressures have been subtle. In the United States, banking regulators have issued vague guidance to companies taking bailout money, simply urging them to lend domestically.
Overall, private capital flows into emerging markets are estimated to drop to $165 billion this year, down from $929 billion in 2007, the Institute of International Finance said.
The decline in bank lending in emerging markets is not entirely the result of government directives. Many banks are scrambling to repatriate funds from overseas subsidiaries to bolster balance sheets at home. In addition, many banks regard some emerging markets, particularly in Eastern Europe, as too risky at the moment.
"I can't say that we know their reasons, but it does appear that some banks are preferring to lend for projects in their home countries rather than projects here," said Abel Garamhegyi, Hungary's state secretary for international economic relations.
The Royal Bank of Scotland started as a local bank and stayed one for most of its history. Its early directors waited nearly 50 years before opening their first branch outside the city, in nearby Glasgow.
Its transformation into one of the world's largest banks dates to 1988, when RBS took over Rhode Island-based Citizens Financial Group. It went on to launch takeovers in Britain and around the world, scooping up English rival NatWest and investing in Asia and Latin America.
Analysts say its fatal mistake was the 2007 acquisition of Dutch bank ABN Amro right before the burst of one of the biggest credit bubbles in world history. Saddled with toxic assets including U.S. subprime mortgage debt, ABN's former operations accounted for the majority of RBS's historic $34 billion loss in 2008. Faced with imminent collapse as credit dried up late last year, the British government rushed in with a series of bailouts of billions of dollars, giving the government well more than half ownership in the bank. Analysts say the government stake could rise to 95 percent in coming months.
In recent weeks, RBS has laid out a plan to put up for sale its operations in Argentina, Pakistan, the Philippines and elsewhere. RBS says the United States, where it operates as Citizens Bank and Charter One, remains one of its "core markets," though it has sold some operations and cut back others.
Despite the cuts, proponents of a domestic lending boost maintain that bailed-out banks like RBS should be more beholden to the taxpayers, especially because they are now the primary owners.
Peter Ruffell, who runs Redtree International, is one of those who benefited. When he tried to secure loans in recent months to keep his promotional marketing company going, he was turned down by a bank that had not received a government bailout. RBS, by contrast, agreed to lend him $350,000 as part of a government program designed to help small businesses in Britain.
"The money was absolutely vital," Ruffell said. Although he still believes banks should make lending decisions based on what they see as the most profitable option, whether at home or abroad, he added, "There was a lot of reckless lending in the past, particularly overseas."
Jordan reported from London. Special correspondent Karla Adams in London and researcher Julie Tate in Washington contributed to this report.