RBS and investment banking: giving up the golden egg?

As many as 10,000 bankers at Royal Bank of Scotland face the prospect of losing their jobs, as the state-owned UK bank draws up detailed plans to retreat from investment banking.

The job cuts – combined with an expected £1bn-2bn of restructuring costs

The cuts are expected to focus on RBS’s equities business, which has failed to compete in the upper rankings of the industry.

One person familiar with the bank’s plan said it was preparing to exit the cash equities business entirely and may also withdraw from equity derivatives, mergers and acquisitions advisory and shrink its structured credit and interest rates business.

A rabid UK mass media, looking at the losses incurred and the earnings of senior RBS staff in recent years, called for the division to be consigned to the dustbin of history. And yet Hourican decided to take on the responsibility of running what is in effect RBS’s investment bank – the most pilloried type of job in banking, at one of its most pilloried institutions.

Of course Hourican, a charming yet razor-sharp 38-year-old Irishman, does not see it that way. "Let’s get over the misunderstanding that having a wholesale business is a bad thing," he says. "Yes, we had a very large balance sheet at a terrible time. But a small percentage of our business created the losses. Most of our businesses are fundamentally good. They have not just survived the past difficult couple of years in the market, they have flourished."

But RBS’s wholesale banking operation is already a very different animal to what it was six months ago. Entire business lines have been shut down. They include product areas in which RBS was previously a clear market leader, such as project finance and leveraged finance – the latter a painful decision for Hourican as it was a division for which he had previously been directly responsible.

Tougher still, perhaps, has been to motivate remaining staff who have suffered both personally and professionally at RBS. Speculation about job losses and compensation at RBS had become the subject matter for the front pages rather than the business pages.

Hourican had to get his key staff on side. He articulated a clear strategy to them in order that they could, as he puts it, "regain their pride and their composure", and made them a firm commitment. "Our job is to recover value for our shareholders," he says. "And we will do that with people who want to be here and have the skills and drive to fulfil the potential within our business. That means we have to pay competitively to keep or get the right people. My bond with my staff is that they will not be disadvantaged for working at RBS rather than our competitors."

Foreign exchange provides the best return on equity of any capital markets business. To drive more volume through their franchises, banks need a successful prime brokerage business. For RBS, it holds the key to making up lost ground in foreign exchange.