The ends and means of banking: the Royal Bank of Scotland after the 2008 crisis

ABSTRACT The distress wreaked on small businesses by the Royal Bank of Scotland’s turnaround division, the Global Restructuring Group, is one of the most egregious examples of bank misconduct in recent decades. Such misconduct invites reflection on the role of commercial banks in the creation and use of money. To what ends and by what means do commercial banks perform this role? This article considers ends in the sense of whose interests banks ought to serve; and it considers means in the sense of the allocation of decision-making authority. It then turns to the drama of RBS after 2008 to document how allocations of decision-making authority by corporate law and secured transactions law benefited short-term financial interests to the detriment of RBS’s small business customers. It concludes by suggesting an alternative distribution of decision-making authority to counteract such short-term financial interests.


Introduction
A software development company in Oxfordshire; an architecture firm in Norwich; a hotel group in East Anglia; a care home in Bournemouth; a private school in Sheffield; a music producer in Glasgow; a barn conversion company in Aberdeen. These seven businesses banked with the Royal Bank of Scotland (RBS). 1 The financial crisis of 2007-08 left them financially distressed but viable. RBS responded by referring these and thousands of manipulation of LIBOR, the influential wholesale money market interest rate. 16 Yet what makes these allegations of malpractice all the more controversial is the public support received by financial institutions in 2008. As the UK's largest bank at that time, RBS received more support than most: the UK Treasury invested £20 billion of capital and insured assets worth £282 billion. 17 To justify that support, the Chancellor of the Exchequer, Alistair Darling, explained, 'if you don't have a banking system that provides credit for businesses, then you will make the recovery and prosperity after that much, much more difficult'. 18 Darling's view is widely shared: 'when banks fail, the economy fails too' 19 is a common refrain, since financial instability would 'significantly impair the supply of credit'. 20 Yet today, when 'the dark clouds of past misconduct still hang heavy over the SME finance market', 21 and amidst numerous other misconduct allegations, that justification is at variance with 'the core dysfunctions of today's financial system', 22 including that banks like RBS are 'too big to fail' while other businesses are not.
Marginalised and mistreated customers; mistrusted financial institutions; a dysfunctional financial system. What do these controversies reveal about the ends and means of banking? To explore this question, this article considers ends in the sense identified by Stephen Bainbridge when he asks: whose interests should prevail? Bainbridge distinguishes that question from a related one about means. Thinking about means, Bainbridge suggests, invites the question: who holds decision-making authority? 23 And asking that question in turn elicits what Geoffrey Ingham calls 'the money question: who should control its creation and how it should be used'. 24 Money is today created and put to use by '[o]ne of capitalism's distinctive characteristics … a franchised and regulated banking system'. 25 Like Ingham, Robert Hockett and Saule Omarova's 'paradigm-shifting work' 26 also deploys the term 'franchise', characterising the state-bank relationship as a 'finance franchise', through which the public authorities, as franchisor, delegate to commercial banks, as franchisees, decision-making authority over who gets access to credit and on what terms. 27 Other commentators vary the metaphor, casting the state-bank relationship as a 'social contract' 28 or as an 'outsourcing arrangement', 29 or by casting banks as 'public utilities' 30 or as operating under a 'social licence'. 31 But however phrased all point to a similar dynamic of ends and means: financial '[m]arkets are not ends in themselves, but powerful means for prosperity and security for all'; 32 bank profitability ought to be 'a means to an end and not as an end itself'; 33 banks ought to be 'structures for deploying public wealth in service of human development and economic justice, rather than as the instruments of inequality and accumulation they have become'. 34 As Hockett and Omarova themselves express the dynamic, banks ought to engender 'inclusive and stable economic development', 35 yet 'private actors driven primarily … to satisfy increasingly shortterm market expectations' 36 have generated a 'dysfunctional mode of interaction between the financial system and the real (i.e. non-financial) economy'. 37 Since much of this commentary tends 'to be pitched at a quite high level of abstraction', 38 this article builds on it by analysing a case study of the statebank relationship: the drama of RBS after 2008. This case study allows us to explore why and how banks prioritise short-term financial interests over the aspiration of 'inclusive and stable economic development'. 39 It analyses RBS for three reasons. First, the drama of RBS sets out the relations comprising our franchised and regulated banking system: the state and commercial . 32 Mark Carney, quoted in ibid, 134. 33 Baradaran, n 28 above, 1284. 34 White, n 30 above, 1244. 35 Hockett and Omarova, n 27 above, 1218. 36 ibid, 1215. 37 ibid, 1213. 38 Ricks, n 29 above, 770. 39 Hockett and Omarova, n 27 above, 1218. banking; commercial banking and those to whom banks lend; and how the former affects the latter and with what consequences. Second, and in keeping with Bainbridge's definition of ends, the drama of RBS is a drama of interests in tension with each other: the interests of the Treasury as RBS's largest shareholder clashed with RBS's lending commitments to households and businesses; and the interests of RBS as a secured creditor clashed with the needs of viable SMEs in temporary financial difficulty. Third, and in keeping with Bainbridge's definition of means, the drama of RBS illustrates how allocations of decision-making authority determine whose interests prevail when interests conflict.
The structures of private law, such as corporate law and secured transactions law, set out the terms and mark out the pathways through which banks determine who gets access to credit and on what terms. In what follows we identify the allocations of decision-making authority by corporate law and secured transactions law that saw short-term financial interests prevail ahead of inclusive and stable economic development. And we conclude that to reform our franchised and regulated banking system, we may need to encourage public alternatives to credit allocation by shareholder-driven banks.
This article divides as follows. Section one situates private law within our franchised and regulated banking system before introducing corporate law and secured transactions law. Section two considers the role of corporate law in RBS's recapitalisation in 2008-09; section three considers how that recapitalisation interacted with the lending agreement between RBS and its SME customers to the detriment of these customers. Sections four and five extend insights from the analysis of RBS to the COVID-19 crisisthe second major financial and economic crisis in two decades. Section six concludes by suggesting an alternative distribution of decision-making authority.

The ends and means of banking
A franchised and regulated banking system In Hockett and Omarova's account of the franchised and regulated banking system, the state takes on each commercial bank's 'privately-issued debt liability as a liability of its own'. 40 That accommodation 'monetizes a private liability', 41 guaranteeing the 'spendability' 42 of bank liabilities as money. And it marks out commercial banks as 'privileged purveyors' of the state's currency. 43  enable, 44 and one which is justified by the assumption that commercial banks have 'superior ability to gather and process vital market information at the micro level faster and more efficiently than any one agent such as the state is able to do'. 45 Central bank liquidity support, deposit insurance, and, if need be, government capital injections and asset guarantees maintain the equivalence between bank private credit money and state money. To discourage excessive credit creation, the central bankresponsible for 'maintaining appropriate aggregates of credit' 46deploys monetary policy, varying its interest rate in response to the rate of inflation and level of employment. And regulatory authorities provide and enforce the 'quality control' 47 standards familiar to actual franchise arrangements: in the UK, the Prudential Regulation Authority supervises the financial resilience of banks, while the Financial Conduct Authority regulates how financial institutions sell products or services to customers.
Private law structures like corporate law and secured transactions law set out the terms and mark out the pathways through which private financial institutions allocate credit. The insights of the American legal realist and institutional economist, Robert Lee Hale, help to delineate how they do so. Hale builds on the work of Wesley Hohfeld. 48 In Hohfeld's framework, legal entitlements for some correspond to disentitlements for others: the right of one party must correspond to another's duty, just as a privilege must correspond to the absence of a legal remedy. Hale follows Hohfeld by demonstrating how one party's freedom will be experienced as coercive when viewed from the perspective of the other party. 49 Property law gives the better endowed party the capacity to withhold that which the other side needs; to the extent that they can withhold, the law of contract will put them in a position to set terms of access. The process is coercive in the sense that the less endowed party may feel pressured or forced or required to accept these terms unless it wishes to forgo access to that which it needs.
The background rules of private law determine the choices open to the parties and the extent to which they can pressure each other. Building on Hale's analysis, Duncan Kennedy identifies two general categories of rules that determine the distribution of decision-making authority. Kennedy's first category are those 'rules governing the conduct of the parties during bargaining'; his second are those 'rules that structure the alternatives to remaining in the bargaining situation'. 50 In the narrative to follow, this article identifies rules in the first category by showing how corporate law and secured transactions law distributed decision-making authority in ways favourable to the short-term financial interests of shareholders and secured lenders but detrimental to small businesses. Along the way, this article identifies moments where limits to the availability of alternatives under the second category of rules re-enforced the authority allocated by the first category. The article concludes by suggesting that, to empower small businesses in response to bank misconduct, reforms should create alternatives to bargaining with commercial banks. For now, the next subsection considers corporate law, the subsection after secured transactions law.

Corporate law
Financial regulators believe that banks financed by more equity and less debt as required under Basel III 51are best placed to absorb losses, and that (in theory at least) makes such banks safe and sound compared to highly leveraged banks. Common equity's loss absorbing capacity distinguishes it from debt and affords it prominence in the Basel Accords. It also distinguishes shareholders from other corporate constituencies, both with respect to banks and more generally. Corporate constituencies such as investment creditors and employees contract for predetermined payments from the company. 52 Shareholders, by contrast, do not have a fixed claim against the company that affords them a predetermined share of the company's surplus; instead, they receive income from the company only after the company has honoured its contractual commitments and only if the board of directors decide to declare a dividend. in the allocation of its resources, including scope to write-off losses. And, some scholars argue, it also gives shareholders reason to hold management to account, for it is only if management maximises the company's surplus that shareholders stand a chance of receiving a return on their investment. 53 In the UK, management decision-making authority over resource allocation both generally and in the context of banking is subject to accountability to shareholders, accountability which a range of corporate law (as well as capital markets law) mechanisms help to facilitate: 54 investors benefit from disclosure rules that require the company issuing shares to provide information about its activities; 55 once the investor becomes a shareholder, she is entitled to sell her shares, 56 to influence management strategy by appointing 57 and by removing directors, 58 and, in some circumstances, to approve corporate transactions; 59 and she is entitled to expect company directors to promote the success of the company 'for the benefit of its [shareholders] as a whole'; 60 if the directors fail to do so, she and her fellow shareholders may in some circumstances litigate on behalf of the company against the company's directors. 61

Secured transactions law
Whereas shareholders both generally and in the context of banking may use the entitlements assigned to them by corporate law to challenge and steer management, other corporate constituencies excluded from corporate law protect their interests by bargaining over the terms of their contract with the company. And it is one such contract, in the context of banking that between the bank and those to whom the bank lends, that takes us to 53 ibid, 146. 54  secured transactions law. We turn to that area of law in a moment. Before doing so, consider first the shadow cast over it by insolvency law.
Before the Enterprise Act 2002, in the UK the right of secured creditors to appoint an administrative receiver in the event of the debtor breaching the lending agreement allowed the secured creditor to control formal insolvency procedures. 62 The receiver would take control of the debtor's business and had the power to sell its assets; their objective was to maximise the value of these assets for the benefit of the secured creditor alone. The Enterprise Act largely abolishes receivership. 63 In its place, the Act channels formal insolvency proceedings towards administration, a procedure controlled by an administrator who must pursue a hierarchy of objectives: to save the company if that is possible; if it is not possible, to achieve a better outcome for creditors as a whole than the outcome of liquidation; and, if that is not possible, to sell the secured assets for the benefit of secured and preferential creditors. 64 From a secured creditor perspective, then, administration is not necessarily advantageous because the administrator (not the secured creditor) runs the rescue operation and must consider the interests of all creditors (and not only secured creditors). 65 But formal insolvency is not the only option at the disposal of secured creditors such as banks in response to financially distressed debtors, and it is possible that the changes to formal insolvency procedures noted above may have encouraged banks to place greater emphasis on pre-insolvency options. 66 Such optionsincluding the option of informal business rescue follow from secured transactions law. When the bank registers a valid security interest in an asset of equivalent value to the loan, doing so gives it two advantages: priority of payment and influence over what the borrower may do with the asset that is used to secure the loan. 67 With respect to the latter, for example, the bank may prevent the borrower from selling the asset, an advantage reinforced by terms the bank may add to the lending agreement to further control and monitor the borrower. 68 And 'events of default' as set out in the lending agreement's default clausefor example, if the borrower fails to keep up with repayment commitments or breaches covenantsreveal the full extent of the lender's options. In these circumstances the bank may accelerate repayment of the loan; or, if it has a fixed charge, it may enforce its security interest by realising the value of charged property; or, if permitted to do so by the terms of the lending agreement, the bank may charge additional interest or levy extra fees; and it may in addition to these charges, or as an alternative to them, refer the distressed borrower to its turnaround division, a form of informal business rescue that we explore later.
Common equity absorbs, and secured lending protects against, financial loss. Corporate law and secured transactions law buttress these pillars of financial support by allocating decision-making authority to shareholders and to lenders. Notice, however, the Hohfeldian insight: that these allocations of authority correspond to the absence of, or limits to, the choices available to others. A lending agreement favourable to the lender allows it to benefit from terms and conditions which curtail the extent to which the borrower may use the money lent as she sees fit; similarly, when shareholders buy shares they acquire legal entitlementsto elect or to remove directors, for examplethat check the scope of corporate management to use the company's assets as they see fit. Given these advantages and corresponding disadvantages, what is to stop the empowered partyshareholders, secured lenders from using their advantages to withhold and to set terms of access that further their own interests at the expense of the less empowered party?
That question matters even more when interests conflict. As we now document, the example of RBS after 2008 saw a range of interests in tension with each other: the interests of the Treasury as RBS's largest shareholder clashed with RBS's lending commitments to households and businesses; and the interests of RBS as a secured creditor clashed with the needs of viable SMEs in temporary financial difficulty. As the next two sections show, the allocations of decision-making authority by corporate law and secured transactions law steered these conflicts in ways favourable to the short-term financial interests of shareholders and creditors yet detrimental to small businesses and inclusive, stable economic development.

The Recapitalisation of RBS
The 'fundamental tension' and the government's priorities In its 2007 annual report RBS boasted about its 'Global Bank of the Year 2007' award. 69 Following its acquisition of the Dutch bank, AMN AMBRO, it was one of the largest banks in the world by market capitalisation. 70 Global Banking & Markets, RBS's investment banking division, led the bank's growth in the years up to 2007. 71 Like other banks before the crisis, Global Banking & Markets prioritised 'securitised' credit, the collateralised debt obligations and credit default swaps later made infamous by the crisis. 72 The former were structured out of US mortgages. When the US housing market collapsed and borrowers could not make mortgage payments, RBS held collateralised debt obligations that might be worth little or nothing. 73 Other banks were similarly situated. 74 In these circumstances, the UK government worried about 'the risk of one bank collapsing and taking all the others'; 75 Alisdair Darling, the Chancellor of the Exchequer, feared that such an event would cause 'terrible collateral damage … to our economy'; 76 to avoid that damage, Darling considered it 'vital … to prevent a complete collapse of the financial system'. 77 To avert that outcome, the government's Bank Recapitalisation Scheme invested £37 billion into the UK banking sector. RBS received £20 billion in return for which the Treasury acquired a 58 per cent shareholding. In the worsening economic situation of the months which followed, the Treasury injected further capital into RBS taking its shareholding to 84 per cent. Full nationalisation might have followed but for the introduction of the Asset Protection Scheme (APS), under which the Treasury protected RBS against further losses by insuring £282 billion worth of assets. 78 These numbers are eye-popping. In response, during 2008-09 the government tried to 'provide assurances to the public that the banks face a quid pro quo in return for Government money'. 79 For example: the government insisted on the departure of RBS's chief executive and other top officials; 80 the APS placed some of the losses solely with the recipient banks and imposed on these banks tens of millions of pounds worth of mortgage and business lending commitments; 81 the European Commission approved this state aid on the condition that banks like RBS reduce their size and market share; 82 and the government applied a bonus tax and a bank levy to all banks. 83 So it would be unfair to follow one MP's assessment of the Treasury as 'squeamish and sensitive about the banks; you touch them with a feather duster'. 84 But although the Treasury did not touch banks like RBS with a 'feather duster', its approach was tempered by what one prominent Treasury official referred to as 'a fundamental tension'. 85 Tempering the severity of the conditions imposed by the government was the government's simultaneous desire that RBS 'build [its] capital base up', 86 to 'conserve … protect … strengthen [its] capital and improve [its] balances sheets', 87 because otherwise it was unlikely that the Treasury would 'get our money back from the banks'. 88 The details of the government's support package in October 2008 made it clear that '[t]he government is not a permanent investor in UK banks'. 89 In early 2009, Alistair Darling reaffirmed that objective, yet also publicly recognised the need to get the banks lending again. 90 Observing these conflicting pressures in 2009, the Treasury Select Committee expressed concern 'about the contradictions of the Government's objectives for the banking sector' because, the Committee continued, 'there is an inherent conflict between ensuring that the banks maintain high capital ratios, protecting the taxpayer interest and wanting the banks to increase lending levels'. 91 To address these contradictions, the Committee recommended that the government 'clarify its strategic objectives and priorities'. 92 So, what end did the government prioritise?

UK Financial Investments Ltd
The government's priority emerges from the arrangements through which it implemented its support package. As we saw a moment ago, RBS was 82 See HM Treasury, RBS and the Case for a Bad Bank: the Government's Review (November 2013) 131-33. 83 The bonus tax was introduced in December 2009 by then Chancellor of the Exchequer, Alistair Darling.
It was a one-off tax and applied to individual discretionary bonuses above £25,000. recapitalised rather than nationalised. The government had opted for the latter alternative after the collapse of Northern Rock and Bradford & Bingley. Yet in the case of RBS it opted against nationalisationand, in the years after 2008, a range of other alternatives 93because, as a senior government official observed, 'there are serious advantages in having other shareholders'. 94 Having other shareholders, the official explained, 'helps with the commercial management of the bank'; nationalisation, by contrast, would make 'exit … significantly more difficult and significantly more prolonged'. 95 One consequence of the government's decision to favour recapitalisation was that RBS remained subject to corporate law. 96 As we have seen, UK corporate law makes management accountable to shareholders, its rules and procedures designed to align director decision-making with shareholder interests, its objectives furthered by shareholders monitoring directors. Post-crisis, commentators assumed that the failure of banks like RBS 'would have been tackled more effectively had there been more vigorous scrutiny and engagement by major investors'. 97 The logic of that position supposes that, if shareholders ought to monitor corporate boards, and if corporate boards have failed, then the solution to this problem of corporate governance is greater shareholder engagement. 98 Now, it may be that in general asking shareholders to serve as 'stewards' was and is asking the impossible. 99 But some shareholders do engage. What follows from that engagement? One possibility is illustrated by UK Financial Investments (UKFI), the company created by the Treasury in late 2008 to hold its shares in RBS. 100 Treasury officials expected UKFI to act 'as an engaged, informed, responsible shareholder'. 101 But engagement to what end? According to its mandate, UKFI's objective was to manage the government's investments 'commercially, and with a view to achieving an exit'. 102 UKFI could achieve exit and discharge its mandate only if investors decided to buy RBS's shares, and investors would do that only if they valued RBS's shares as a worthwhile investment, as an investment with an expected rate of return more attractive than the alternatives. 103 From the perspective of investment analysts, judging expected rates of return and levels of profitability calls for '[t]hinking as an investor'. 104 So thinking cultivates 'the investor's gaze', 105 a gaze felt by RBS's mangement since to influence the attractiveness of RBS's shares they had 'to generate returns on equity that will ultimately lead to dividends for shareholders'. 106 In other words, RBS's management had to confront the bargaining power of prospective investors. In Robert Hale's terminology, these investors had the capacity to withhold: they could refuse to buy RBS's sharesand keep RBS's share price depressedunless RBS's management embraced the investors' perspective and expectations. RBS's management would find that challenging, however, if the bank became a 'political football'. 107 As one investment analyst put it, 'Government ownership is a fact'. 108 It followed from that fact, another analyst explained, that '[t]here is a lot of public interest in what RBS does', 109 '[t]here is a lot of comment by Members of Parliament and by the media'. 110 'To the extent that the politicisation of the activities of RBS starts to threaten' the bank's commercial best interests, the same analyst continued, 'I think that does pose a threat, which institutional investors are nervous about'. 111 Investors had grounds for feeling nervous. One MP, for example, pointed out to a UKFI official that 'you're our representatives. We own these banks now, and you're the people who make sure the board do things that we would wish'. 112 As the Chairman of the Treasury Select Committee observed, UKFI, on behalf of the government, was 'the cook with 84% … the head chef'. 113 So why not use that position of authority to direct RBS to increase its lending to SMEs or to restrict the size and terms of bonus payments to bankers?
As the 'head chef' with 84 percent of RBS's shares UKFI had the power, if it wished to use it, to control the election and removal of RBS's directors. In these circumstances, what scope is there for minority shareholders to use corporate law to check the majority shareholder? To probe this question, consider People and Planet v HM Treasury.

People and planet v HM treasury
In 2009 People and Planeta social and environmental justice pressure group 114sought judicial review of the UK government's investment in RBS on the basis that, as the largest shareholder in RBS, the government ought to mandate UKFI 'to persuade or require' RBS to change its lending practices. 115 According to People and Planet, RBS's lending practices were 'harmful to the environment' and 'insufficiently respectful of human rights'; as such, they contradicted the government's Green Book. 116 That document lays down the standards that central government must adhere to when making decisions, and requires that government departments have regard to the environmental impact and human rights implications of their decisions. 117 The Treasury had reasoned that RBS's board would weigh up environmental and human rights considerations when meeting their directors' duties under s.172 of the Companies Act, which requires the board of directors 'to promote the success of the company for the benefit of its [shareholders] as a whole, and in doing so to have regard (amongst other matters) to … (d) the impact of the company's operations on the community and the environment'. 118 Based on this reasoning, the Treasury could then claim that its own decision to defer to the RBS board met the requirements of the Green Book. 119 People and Planet saw the Treasury's approach as too deferential to the board of RBS. It reasoned that, if the UK government wished to adhere to the Green Book, then it must alter UKFI's mandate, replacing UKFI's commercial approach with an interventionist approach to impose 'its own policy in relation to combating climate change and promoting human rights on the Board of RBS'. 120 But Sales J feared that such an approach 'would have a tendency to come into conflict with, and hence would cut across, the duties of the RBS Board as set out in s.172(1)'. 121 If under UKFI direction the directors of RBS promoted environmental and human rights considerations ahead of the interests of the bank's other shareholders, then, Sales J continued, there was the 'real risk of litigation by minority shareholders seeking to complain that the value of their shares had been detrimentally affected by the Government seeking to impose its policy on RBS'. 122 People and Planet v HM Treasury is instructive in two respects. First, and as Lorraine Talbot has observed, Sales J interpreted s.172 instrumentally: directors may consider other interests but 'only insofar as they promote the interests of shareholders, not as independent governance goals'. 123 So reading s.172 reinforces the sense that, as RBS's own CEO put the point in January 2010, 'as with all boards, the Board of RBS has a legal duty under companies law to shareholders'. 124  shareholders, considerations such as those not mentioned in People and Planet but which nonetheless fed the 'fundamental tension' 125 over what to do with RBS, such as 'the likely consequences of any decision in the long term' or 'the need to foster the company's business relationships with suppliers, customers and others'. 126 Second, Sales J emphasised the interests of minority shareholders and by so doing emphasised that directors must promote the success of the company for the benefit of shareholders as a whole. 127 It follows that directors must determine the collective interest of the company's shareholders even when controlling shareholders urge the company to prioritise other considerations. If directors fail to do so, then minority shareholders may have grounds to bring a derivative action on behalf of the company or to petition the courts for relief from 'unfair prejudice'. 128 As is well documented, the successful use of these remedies in the UK by shareholders in public companies is very rare. 129 Yet UKFI was RBS's dominant shareholder in the years after 2008. In this context, Sales J took the threat of litigation to be a 'real risk'; 130 press reports indicate that government ministers shared that concern. 131 And perhaps these fears explain why UKFI did not give RBS's minority shareholders cause to litigate: not only did UKFI respect its mandate and 'the overall context set by the Companies Act that directors have a duty to promote the success of the company for the benefit of its shareholders as a whole'; 132 it also regarded its 'investment mandate [as] king', 133 and so channelled its efforts into reassuring existing and attracting future investors. It is to these efforts that we now turn. year of the Schemethe government's hope was that such lending would support the wider economy in the midst of a recession. 145 Yet RBS failed to meet its business lending commitment for 2009-10, receiving more in repayments than it contributed in new lending. 146 In response, the Treasury could have sanctioned RBS: it had various options at its disposalranging from fines and penalties to naming-and-shaming to more novel options 147but it decided against applying any of them because RBS 'had failed to meet the commitments due to a fall in demand, which was beyond their control'. 148  that role in the most effective way possible'. 157 Its absence would leave '[t]he biggest question mark … in the minds of other investors', namely, 'whether they would feel that the banks are going to be run based on their commercial best interests'. 158 If that question weighed on the minds of investors then, UKFI acknowledged, it would be hard for the government to find that 'whole range of new investors' it needed to sell its shares. 159 But in 2012 the perception amongst investment analysts was that UKFI had 'done a very, very good job out of a difficult situation', 160 for, as one analyst explained, 'if you look at the major strategic decisions that have been made by RBS over the course of the last few years … I think the market believes, correctly, that those were all strategic decisions that were taken because they were the right commercial thing to do for RBS management and for RBS shareholders'. 161

RBS's 'strategic restructuring plan'
As a successful firebreak UKFI created space for RBS to operate on a commercial basis. How then did RBS's board use that commercial freedom? In 2009 the bank's new CEO, Stephen Hester, observed that '[i]t is only if we restore shareholder value-crudely, getting the share price up and creating conditions where investors want to buy our shares-that … the government can sell its shares to willing investors at a profit'. 162 Hester later added 'we obviously won't consider our job at RBS to be successful until we're finally paying dividends again'; 163 as the Treasury observed, paying a dividend again would 'over time make RBS shares more attractive to external investors and accelerate the bank's return to the private sector'. 164 Paying a dividend, Hester explained, depended on RBS's 'ability to A, generate profits, and B, stop spending them on the clean-up'. 165 The bank referred to its clean-up as its 'strategic restructuring plan'. 166 Given the scale of the financial crisis in 2008, in its aftermath many other banks around the world faced the same challenge of revaluing assets and absorbing losses. Their responses to that challenge are examples of what Brett Christophers describes as 'asset vigilance', of banks scanning their balance sheet in search of asset quality and asset margin. 167 How banks did this in the aftermath of 2008 prompted the consultancy firm, McKinsey, to publish in 2012 Good riddance: Excellence in managing wind-down portfolios. 168 The report draws on McKinsey's 'experience with several of these institutions and on interviews with leading executives to collect, develop, and validate the actions and principles that managers of wind-down portfolios are using today to find success'. 169 So, by what actions and principles did banks find success?
The bank first had to identify its 'weak assets', 170 what Hester referred to as RBS's 'unwanted assets'. 171 These were to be segregated from the rest of the bank's assets via structures named 'wind-down divisions', 'legacy assets', 'collection bank', 'value bank'; McKinsey's report preferred the term 'bad banks'; 172 RBS settled on 'non-core division'. 173 Once the bank had identified these weak assets and segregated them, '[t]he essential question is whether to hold assets until maturity or sell them, and if they are to be sold, how quickly?' 174 Both a 'rapid wind-down' and a 'leisurely wind-down' had their advantages and disadvantages. 175 Whether a bank opted for one or the other was conditioned by the 'funding climate in which it operates', which was in turn conditioned by the willingness of private shareholders and government 'to shoulder additional borrowing for many years, … [and] support the funding of its bad banks over the long term'. 176 Neither the UK government nor RBS's board was willing to shoulder the burden of such support; instead, their interests converged on the government selling its shares in RBS as soon as possible, a consensus shared by investors 177 and one which steered RBS toward 'rapid winddown'. RBS's strategic restructuring plan anticipated in 2008 that it would take three to five years 'to run off or dispose of' the 'unwanted assets' in its non-core division. A 'rapid wind-down' removes the assets from the bank's balance sheet but at the cost of accepting a discount on their price; a 'leisurely wind-down' avoids that discount but at the risk of the asset values declining further. 176 ibid. 177 According to one analyst '[t]he overhang or the presence of a single Government shareholder owning over 80% of the shares is an inhibiting factor on other commercial organisations wanting to own shares in the company', evidence of Talbut, n 107 above, Q 92. 178 RBS, n 164 above, 5.
Once the bank had decided on its wind-down strategy, it could then allow its workout unit to begin renegotiating loan terms with borrowers. The McKinsey report singles out RBS's restructuring plan and its implementation, offering it as an example for others to follow, even interviewing Rory Cullinan, the head of RBS's non-core division. 179 In 2010 Stephen Hester, while acknowledging that RBS faced the 'biggest and most complex bank or company restructuring in history', added '[s]o far I have been incredibly pleased by how well it has gone'. 180 Two years later investment analysts reiterated that sentiment, one observing that '[t]he progress that [the board of RBS] have made on their strategic plan has been very impressive so far. I think there has been an enormous reduction in the non-core assets, which has been ahead of plan and within their guideline of losses expected'. 181 In his 2014 book, Shredded, Inside RBS, Ian Fraser noted that '[t]he shrinkage that occurred under Stephen Hester was impressive'. He then adds, 'but it came at a huge cost in terms of the destruction of whole swathes of the UK's small and medium sized enterprise base … '. 182 The next section turns to these huge costs and the SMEs who bore the burden of them.

Turnaround objectives and commercial objectives
The government's support package of 2008-09, including the recapitalisation of RBS, had the explicit objective of preventing banks from collapsing to maintain 'support for the real economy' and 'lending in the medium term'. 183 The size of SMEs limits their cash reserves and access to capital markets; to expand and to survive adversity they therefore turn to and are dependent on banks. 184 When the 2008 crisis turned into a recession, viable but financially distressed SMEs turned to their bank for that support. If there is an 'event of default'if, say, the financially distressed SME fails to honour repayment commitmentsthe bank might decide to enforce its security by selling the charged property. 185 Alternatively, it might try to revive the fortunes of the struggling business, either through formal 179 Aggarwal et al, n 168 above, 6. 180 Evidence of Hester, n 124 above, Q 38. 181 Evidence of Costello, n 161 above, Q 3. 182 Fraser, n 70 above, xvii. 183  procedures such as administration, or through informal processes. 186 Earlier we saw that from a bank's perspective administration is not necessarily advantageous because the administrator runs the rescue operation and must consider the interests of all creditors. By contrast, secured creditors such as banks dominate the informal rescue operations conducted within the bank by its turnaround division (or 'business support unit'). 187 Between 2008 and 2013 RBS referred just short of 6,000 SMEs to its turnaround division, the Global Restructuring Group. 188 As the UK's largest lender to SMEs at the time, RBS's referrals covered a broad sample of SMEs the length and breadth of the country. GRG's 'primary aim' was to help these businesses 'return to satisfactory', in other words, restore the troubled business to financial health and return it to the mainstream bank. 189 Yet GRG also had a second objective, described in its mandate as 'to improve [the bank's] position', elsewhere as 'to minimise losses for RBS and to execute effective asset management strategies that demonstrate value'. 190 That these objectives may sometimes conflict became a matter of public concern in late 2013 when Lawrence Tomlinson, entrepreneur-in-residence at the Department of Business, Innovation and Skills, published a report alleging that GRG 'engineered' the default of SMEs in an attempt to 'make profits for the bank through the destruction of viable businesses'. 191 In response to these allegations, the Financial Conduct Authority appointed Promontory Financial Group to conduct an independent review of GRG. 192 The independent review concluded that, although there was no evidence of deliberately engineered defaults, 'there was widespread inappropriate treatment of customers by GRG'; 193 that the vast majority of these businesses were viable and, with the right support, could have been turned around; 194 and 'that in a significant proportion of cases … that treatment appears likely to have caused material financial distress' 195 to such an extent that in numerous cases it contributed to 'a journey towards administration, receivership and liquidation '. 196 The independent review did not criticise GRG's commercial objective. 197 The problem, rather, was that there could be '[f]undamental conflicts between the underlying objectives of GRG': 198 as the independent review explains, 'in a turnaround context, where the customer is already exhibiting financial distress, such commercial considerations need to be balanced against the need to foster an environment that is conducive to the customer's return to health … '. 199 How, then, might GRG have managed the conflict between its two objectives? What would it have entailed for it to pay regard to the interests of its customers and to have treated them fairly?

Navigating turnaround
If the bank judged the struggling SME viable, 200 as a next step the bank would think about a recovery plan. 201 Such a plan ought to contain 'appropriate objectives and milestones', 202 the achievement of which the bank could help to facilitate by the appropriate use of turnaround tools. 203 The independent review emphasises two such tools: forbearance and new credit. When the bank exercises forbearance it will forego the exercise of its legal entitlements: it might forgive debt, postpone debt payments, or waive additional interest charges or fees. The bank's exercise of forbearance would allow the SME a period of time to, for example, weather a temporary drop in income during a recession or implement changes to its business to return to profitability. 204 Similarly, as the independent review explains, additional credit from the bank would be appropriate 'for example to allow a development to be completed where the evidence indicated that this was the best way forward'. 205 These turnaround tools serve as examples of the bank loosening what Perry Mehrling calls the borrower's 'settlement constraint', the SME's promise to repay the bank on a specified date. 206 Debt forgiveness waives that obligation; postponement and additional credit move it into the future. But there are limits to the bank's capacity to adjust the discipline this constraint exercises on the borrower. The bank has its own payment obligations. Where the bank waives or moves the payment commitment into the future, the bank loses a cash inflow that would otherwise help it to meet cash outflows, such as honouring payments on behalf of depositors. Turnaround divisions must, then, navigate a tension: on the one hand, the essence of turnaround requires that the bank foster an environment conducive to returning SMEs to health, which in turn requires that the bank give the SME time to turn itself around by extending financial support to the SME; yet on the other hand, to extend such support the bank must sacrifice its short-term commercial interests, which in turn requires that the bank pull back from using its legal entitlements as a secured lender.
Whatever the bank decides that the decision lies with it indicates the extent of the bank's legal entitlements and the extent of the borrower's corresponding vulnerability. That power reflects concentration in the banking sector, described by one government minister as 'lots of Davids and four Goliaths'. 207 Most SMEs had little choice but to accept the bank's lending decision: as Robert Hale might have put it, the bank can withhold finance from the SME unless the SME accepts the bank's terms and conditions. That's true of thriving SMEs; 'SME customers facing financial hardship may have even more limited choices' because '[t]hey will often have little realistic prospect of changing their banking arrangements'. 208 Given that SMEs must bargain with the bank, to what extent do rules of law encourage courses of conduct which might check the bank's decision-making authority and guide it to prioritise turnaround?
The terms and conditions of the lending agreement GRG claimed due regard for the interests of its customers as part of its ethos. 209 To strengthen that claim, in 2010 RBS applied the financial regulator's Treating Customers Fairly (TCF) initiative to all its divisions, including GRG. 210 The regulator had introduced TCF in 2006 211 in an attempt to push financial firms to give greater weight to the fair treatment of retail customers by articulating expected outcomes such as: 'Customers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture'. 212 Since RBS's relationship with commercial borrowers was (and still is) an 'unregulated activity,' it was not legally required to adhere to TCF outcomes. 213 Yet RBS of its own accord applied TCF to GRG. In December 2010 GRG's Policies and Procedures were drafted accordingly, stating 'TCF is at the heart of how we do business at GRG … Typically, we are dealing with customers who are in distressed circumstances, therefore it is even more important that we deal with our customers fairly and sensitively, as our aim is to return such businesses back to the mainstream Bank'. 214 Such an ethos echoed the expectations of many SMEs, who reportedly 'trusted their bank to act in their interests' 215 on the assumption 'that the bank owed their business a duty of care or would act in good faith'. 216 Yet because commercial lending falls outside the FCA's jurisdiction, the regulator will not act in response to a failure to meet these standards. 217 In the absence of regulatory oversight, the relationship between the turnaround division and its SME customers is 'mainly governed by the terms and conditions of the commercial contract between them', 218 which in turn entails that SMEs 'must rely … on the [] limited causes of action available under the general law'. 219 The law of contract, for example, might influence the content of the parties' obligations either by policing the substantive fairness of their agreement through implied terms, or by policing procedural fairness in the process of contract formation (or renegotiation) through doctrines like duress. PAG v RBS 220 examines the former, Morley v RBS 221 the latter; both cases illustrate the limited role of contract in policing the lender's control of the turnaround process.

Contractual discretion
Between 2003 and 2007 PAG, a property development company, borrowed from RBS on the security of its property portfolio and, moreover, agreed to various interest rate derivatives (or 'swaps') from which PAG benefited financially when interest rates increased but incurred substantial costs when interest rates decreasedas they did during and after 2007-08. These costs placed PAG under considerable financial pressure which in 2010 led RBS to transfer it to GRG. As it was entitled to do under the lending agreement, in 2013 GRG had the charged properties revalued. It did so because a loan-tovalue ratio above 75 percent would constitute a breach of covenant; a breach of covenant would put PAG in default; and an 'event of default' would allow GRG to call in the loan or levy a range of fees and charges.
The issue in PAG was whether the revaluation provision allowed GRG to exercise an absolute contractual right or a contractual discretion. PAG argued that the valuation provision was a contractual discretion; as such it contained an implied term that the 'discretion be exercised honestly and in good faith [and] … must not be exercised arbitrarily, capriciously or unreasonably'. 222 The Court of Appeal observed that 'the power conferred by [the valuation provision] was not wholly unfettered'. 223 As such, the contract contained an implied term that GRG could not, for example, exercise that power to 'vex' the SME 'maliciously' by, say, 'requiring a valuation every week or even every day'. 224 Rather, GRG had to exercise the power 'in pursuit of legitimate commercial aims'. 225 Such aims were, however, defined broadly: GRG was 'free to act in its own interests … and was under no duty to attempt to balance its interests against those of [PAG]'. 226 The Court of Appeal's judgment in PAG is instructive in three respects. First, it confirmed that the courts will add to the terms of the lending agreement by implying a term that fetters the exercise of contractual discretion. As explained by the Court of Appeal in Socimer, the 'concern is that the discretion should not be abused'. 227 That means the party exercising the discretion must act in good faith in the sense that their decision must be made honestly rather than maliciously, and that they must not exercise the power for an improper purpose or without a rational or factual justification. 228 But, second, asking the party with decision-making authority to act honestly and for a legitimate commercial purpose is a 'mild form of control'. 229 As Solene Rowan explains, while judicial control of contractual discretions might counter the most egregious abuses of power, the courts have shown little interest in 'fulfilling wider ambitions of promoting positive standards of behaviour'. 230 And, third, this 'mild form of control' is limited to the exercise of contractual discretion. Where the bank has absolute contractual rights at its disposalas for instance when an event of default allows the lender to call in its loan 231there is no suggestion that implied terms constrain the bank. Instead, English contract law's default position comes to the fore: that outside of piecemeal interventions such as the limited controls over contractual discretion, there is no general principle of good faith, and the parties may pursue their own commercial interests without regard for the interests of the other party. 232

Economic duress
If the courts are reluctant to add terms to the agreement, how willing are they to free parties from terms to which they have agreed? One doctrine that allows the courts to relieve a party from prior commitments is that of duress. Morley v RBS is instructive because it illustrates the height of the threshold for establishing duress. Like PAG, Morley's business developed commercial property and from 1999 to 2010 (apart from a break in 2005-06) banked with RBS. In late 2006, RBS agreed to a three-year £75 million loan to enable Morley to add additional properties to his property portfolio. The loan was secured by a charge over 21 properties owned by Morley. The events of 2008, however, left Morley unable to repay the loan and led to a fall in value of his property portfolio. That fall in value put Morley in breach of the lending agreement and prompted RBS to transfer his business to GRG. In 2010 GRG offered to release its security if Morley paid £20.5 million for five of the 21 properties; the remaining 16 properties were to be transferred to West Register, an RBS subsidiary established to manage the property of failed business customers. If Morley refused the offer, GRG threatened to appoint a LPA receiver, with the consequence that all 21 properties would be transferred to West Register. quotation in the text is from page 20 of the version of the article available at https://discovery.ucl.ac. uk/id/eprint/10088548/3/Davies_6.Davies%20-%20Excluding%20Good%20Faith.pdf 230  Morley agreed to GRG's offer but later claimed to have done so under duress. Drawing on DSND Subsea v Petroleum Geo-Services, 233 Morley argued that GRG's threat to appoint a LPA receiver if he did not accept GRG's offer was 'illegitimate' because it amounted to pressure to enter the contract that left Morley without a practical alternative. 234 Kerr J accepted that the 'narrative, tone and demeanour', 'the evident disdainful insouciance' of GRG's representative placed GRG's offer 'in the category of a threat': 235 it instructed the claimant to do as we ask or else, and was 'intended to concentrate the minds' of the claimant's representatives. 236 But threats are not necessarily illegitimate conduct that amounts to economic duress; as Dyson J put it in DSND Subsea, the illegitimate threat must be 'distinguished from the rough and tumble of the pressures of normal commercial bargaining'. 237 And reaching the threshold for economic duress is even more daunting where the threat is to carry out a lawful act. Since Morley had breached the loan-to-value ratio under the lending agreement, GRG was entitled to enforce its security and to do so as part of a 'robust (and even aggressive) negotiation'. 238 Something moresomething 'reprehensible'was and is needed to turn the threat to enforce that security into an illegitimate threat that amounts to economic duress. 239 Morley could not reach that threshold. But the broader point is the willingness of the courts to allow banks to aggressively threaten their SME customers. The independent review refers to such threats as GRG's 'leverage': 240 if the SME had breached the lending agreement, GRG could use its 'extensive legal rights as lender' 241 to threaten to impose fees or to withhold credit facilities as a 'negotiating tactic to achieve its objectives'. 242 It is to this leverage and its contribution to RBS's objectives that we now turn.

GRG's objectives: exploiting leverage, generating income
The independent review documents GRG's: inability or unwillingness to transparently value its customers' assets; 243  instruments'; 245 hostility to so-called 'non-core' assets; and enthusiasm for fees, fines, and interest rate increases. Below we document the last two activities in greater detail. Earlier we saw RBS establish a non-core division as part of its strategic restructuring plan to 'rebalance [its] risk exposure by exiting more capital intensive assets and assets no longer deemed core to RBS strategy'. 246 RBS classified as non-core about half the businesses referred to GRG. 247 GRG did not exercise forbearance or renew credit facilities for non-core SMEs, but instead tried to reduce the debt owed by these customers. Sometimes it did so by withdrawing credit facilities: the independent review observed one case where GRG gave an SME 28 days' notice that its invoice financing facility would be reduced from £2 m to £250,000. 248 At other times GRG required SMEs to use the proceeds of asset sales to pay down debt. 249 Frequently, GRG used the SME's breach of the lending agreement to impose charges and fees that had little justification beyond increasing the cost of banking with RBS; GRG hoped such costs would 'galvanise [the SME] into action' 250 to refinance with another lender. 251 GRG's hostility to non-core assets demonstrates its role as a 'profit centre' for the bank, 252 its approach 'weighted towards prioritising "the contribution to RBS's bottom line".' 253 To further that end, GRG encouraged its employees to renegotiate the terms of credit facilities after 2008 to adjust pricing to better reflect post-crisis perceptions of risk. And if the SME breached the lending agreement, then GRG could apply leverage as part of the renegotiation: it could increase interest payments to a higher rate, apply a range of fees, or threaten to withdraw credit facilities, all of which helped the bank extract revenue from the SME, and which sometimes helped GRG force through new terms advantageous to the bank. In one case GRG imposed on a financially distressed SME a loan restructure fee, numerous overdraft arrangement fees, and third party fees, in this instance legal fees and fees to pay for a valuation of the SME's assets. 254 In addition to these fees, GRG had at its disposal monthly fees and exit fees, risk fees and excess fees, waiver fees and commitment fees. 255 Transfer to GRG itself came with its own fee to compensate GRG for its turnaround expertise, which prompted one SME owner to respond: 'I feel aggrieved at the fact that you want to charge the company £1,000 per month for the privilege'. 256 The aggravated owner had a point and the independent review agreed: 'Simply demanding more money from already financially distressed businesses was often unrealistic'. 257 GRG's turnaround objective required that it act with care when imposing fees on SMEs in financial difficulty. In practice, however, the independent review concluded that 'some of the pricing that we observed was, in our view, inappropriate … or otherwise excessive … There was … a significant group of cases where pricing appeared to us to be questionable and sometimes opportunistic'. 258 GRG failed to 'identify and manage' 259 the conflict between its objectives because its 'objectives were in practice not equal'. 260 In practice GRG's 'strategic focus' 261 merged with RBS's strategic restructuring plan and, for that reason, its 'focus was on the commercial objective and much less weight was attached to turnaround'. 262 GRG seldom conducted a viability assessment. 263 The independent review did not find a single turnaround plan. 264 And while the independent review did observe GRG exercising forbearance it also found that GRG missed opportunities for additional forbearance or additional credit. 265 GRG may have missed these opportunities because the lead author of the independent review and his team did not encounter GRG employees asking questions such as, 'How can we help this customer reformulate their business? How can we help them get back to a normal banking relationship?' Nor did they identify any evidence of 'pride in having successfully turned businesses around'. 266 What they saw instead was GRG instrumentalising turnaround as a means in the service of RBS's strategic restructuring plan.

From villains to saviours? 267
Stephen Hester was aware of the interests at stake: in the years prior to the 2008 crisis, 'too often people saw the customer as the thing from which you made money, and making money for your shareholders … as being the primary purpose'; the imperative post-crisis was 'to reverse that'. 268 In his evidence to the Parliamentary Commission on Banking Standards, Hester went on to suggest that giving primacy to the interests of customers did not mean that 'shareholders are unimportant'; 269 rather the aim was 'simply to change the order of thought and behaviour … such that people understand that the route to long-term prosperity is serving customers well'. 270 But Hester was also aware of 'the tensions that get in the way of all companies' as they endeavour 'to balance the interests of shareholders, customers, regulators and society at large'. 271 And so, while Hester talked up customer service and the government made a show of lending commitments, simultaneously RBS's board and UKFI set about making RBS attractive to prospective investors. When the interests of investors and customers clashed, the allocation of decision-making authority influenced whose interests prevailed. As the preceding two sections have shown, corporate law mechanisms that align managerial decisions with shareholder interestsin this instance s.172 combined with the threat of litigationsteered the RBS board and UKFI in an investor friendly direction. So steered, RBS used its decision-making authority under the lending agreement to prioritise its commercial interests by inflicting 'material financial distress' on its small business customers.
And yet besides failing its business customers, in the years since 2008 RBS also failed by the yardstick of these short-term financial interests. A decade after its capital injections saved RBS, the Treasury still owned 62.4 percent of RBS's shares; 272 the Treasury's sale in the summer of 2018 of 7.7 percent of its holding amounted to a loss of £2.1 billion; 273 and despite apologising to business customers harmed by GRG in November 2016, such is RBS's shattered reputation in 2020 RBS Group formally changed its name, replacing RBS with its NatWest brand. 274 In the aftermath of so many examples of bank misconduct, other banks also face the challenge of repairing their public image. The COVID-19 crisis the second major financial and economic crisis in two decadesoffered the sector 'a unique opportunity to restore its reputation, particularly with the SME community'. 275 But for banks to transform from 'villains to saviours' 276 and provide 'the necessary flexibility to preserve businesses, jobs and livelihoods during a severe, but temporary health crisis', 277 they would need to 'walk a fine line' to avoid 'calling into question the soundness' of the banking system. 278 As banks weighed these considerations, the Treasury navigated its own 'essential dilemma': 'On the one hand, there was a very urgent need for support to the economy. On the other hand, there was how to balance that against all the usual checks and controls' 279 to ensure the 'good use of public money'. 280 Could the Treasury and the banks navigate these tensions to produce an outcome this time favourable to small businesses and redemptive for the banks? The next section considers the COVID-19 crisis further and does so by focusing on lending to SMEs. 281

THE COVID-19 crisis
To encourage banks to support SMEs during the crisis, in March 2020 the government established the Coronavirus Business Interruption Loan Scheme (CBILS). 282 Orchestrated by the British Business Bank on behalf of the government, CBILS provided businesses with a turnover of up to £45 million with finance of up to £5 million through participating lenders.
The government guaranteed 80 percent of the loan, but resisted full guarantees because it feared 'lending to companies with no prospect of repaying the money'. 283 Since lenders took 20 percent of the risk, CBILS encourage lenders to make 'the credit checks and loan assessments that they would normally make on a commercial basis'. 284 Yet it was precisely these commercial lending checks that proved 'clunky' 285 and 'unwieldy' 286 and prevented 'very small businesses and new businesses from being able to access the lending'. 287 Many lenders wanted a personal guarantee from the borrower; 288 some businesses described the application process as 'Kafkaesque'; 289 others grew frustrated as applications took weeks 'at a time when they were burning through cash'. 290 Businesses had to pay suppliers and employees, yet '[i]f you have only two weeks' money left and you have to wait 10 days to know if you are going to get your loan, it did not feel that helpful'. 291 In May 2020 the government varied its approach. Under the Bounce Back Loans Scheme (BBLS) it again tasked the British Business Bank with orchestrating the scheme, but this time guaranteed the full amount of loans of up to £50,000 or 25 percent of annual turnover. 292 BBLS aimed to get money to borrowers within 24 to 48 h of applying. Prioritising speed deprioritised the checks that characterised CBILS. That 'was a deliberate part of the design' 293 because, although banks served as the 'transmission mechanism' 294 and had to conduct counter money laundering and fraud checks, BBLS took 'most of the decision-making out of the hands of the banks'. 295 It made banks 'more of an administrator of the system' 296 because 'Ministers were clear that they did not want banks to be deciding who [is] a worthy recipient'. 297 Removing credit-risk decision-making resulted in 270,000 loans in the first week of BBLS and around 800,000 in its first month. 298 Between May 2020 and March 2021 BBLS supported 1.5 million loans worth £47 billion. 299 But speed and scale carried trade-offs: a year after BBLS's launch the government estimated that 37 percent of loans would not be repaid, including an estimated 11 percent written off as fraudulent. 300 The Public Accounts Committee worried that the Treasury's 100 percent guarantee combined with the 'focus on the speed of delivery had exposed the taxpayer to potentially huge losses'. 301 Others imagined 'a giant bonfire of taxpayers' money … with banks just handing out the matches'. 302 Given the Treasury's guarantee, do lenders have incentives to minimise a potentially 'eye-watering loss of public money'? 303 The terms of the guarantee agreement require lenders to undertake 'appropriate recovery processes' 304 before they claim the guarantee. After the lender has given the borrower a formal demand for payment, the lender has a 12 month window within which to recover the debt. 305 If the government becomes concerned that a lender is not doing 'their utmost to minimise taxpayer losses' 306for example, because a lender's recovery rate is lower than its peers 307and if it transpires that the lender did not follow the appropriate recovery process, then '[t]he ultimate penalty is that we [the government] refuse to respect the guarantee, or we can claw back'. 308 That ultimate penalty ensures that '[t]here is money on the table here for lenders' 309 and that they pursue recoveries 'in line with their existing business-as-usual standards'. 310 Simultaneously, however, 'Treasury officials also want to avoid the sort of banking scandal that resulted from the last financial crash … '. 311 Others share that concern. One MP remarked, 'Many of us will remember GRG'; 312 a Bank of England official added 'no one wants to see another GRG'; 313 the FT advised banks to 'avoid pillaging weaker small businesses as a couple of lenders did last time … '. 314 Under the terms of the lending guarantee, if the banks do not comply with the FCA's approach to treating customers fairly then the government can refuse to pay out on the guarantee. 315 And therein lies the banks' dilemma: whether too harsh or too lenient, either way they risk losing access to the government guarantee.
Dilemmas such as this have been a theme of this article: should commercial banks prioritise their balance sheet or should they support borrowers in difficulty? Should the state assist productive businesses, or should it safeguard the public finances? A further theme has been the way authority is distributed to determine whose interests prevail when interests conflict. If the government had deferred to commercial banks on how to respond to the COVID-19 economic crisis, the banks would have lent too little too late. A different outcomeone with its own difficulties: the cost of BBLS remains controversial; the recovery process may yet become controversialsaw the state curtail the banks' authority to make credit risk assessments. In Hockett and Omarova's terms, an 'active franchisor' 316 directed credit allocation. Notice how it did so: it provided SMEs with an alternative source of finance to bargaining with their bank. Does that provide a model for a different type of banking?

Conclusion
In March 2012 Vince Cable, the then business secretary, suggested to the rest of the government that it 'recognise that RBS will not return to the market in its current shape' and that it 'use [RBS's] time as ward of the state to carve out of it a British business bank with a clean balance sheet and a mandate to expand lending rapidly to sound business'. 317 When the Treasury opposed that suggestion, Cable established the government-owned British Business Bank to 'increase the supply of finance available to smaller businesses where markets don't work well'. 318 As a public bank, the British Business Bank is instructive in four respects. 319 First, the British Business Bank shows the state and commercial banks sharing responsibility for credit allocation. The British Business Bank does not lend or invest directly, but rather does so through commercial banks and other financial institutions. 320 Earlier we saw two examples of such an arrangement: the British Business Bank orchestrated CBILS and BBLS on behalf of the government, yet the lending was transmitted through commercial banks. By sharing responsibility for credit allocation, the British Business Bank helps to 'lever' 321 existing markets: it expands a market that would be less extensive but for public support, such as lending to viable SMEs who wish to access finance but cannot do so because banks will not lend. As some have argued, public banks could be, and sometimes are, more ambitious: freed from the need to collaborate with commercial banks, they can create and shape markets as well as fix 'market failures'. 322 Butand this is the second pointwhy is a public bank necessary to achieve such ends? Policymakers conventionally respond to bank misconduct or to inadequate levels of SME finance by encouraging competition in banking. 323 Notice, however, the UK's 'merry-go-round' 324 of competition cycles and policy failures. 'Taking a twenty year horizon', one article observes, 'UK governments and regulators appear to be stuck in a closed-loop process of repeated narrative about more competition and failed reforms'. 325 Concentration in banking, then, may not fully account for the problems of bank misconduct and subdued lending to SMEs; what may also contribute to these problems is 'the monoculture of shareholder-owned banks', which 'encourages mimetic behaviours intended to improve return on equity', leaving 'relatively little to distinguish between [banks]' and making 'little difference to customers'. 326 Third, public banks like the British Business Bank break that monoculture. That they do so helps to distinguish them as a reform option from other legal reforms to banking. Reform of s.172 might require bank directors to put customers first and shareholders second; 327 reform of control rights might allocate to the government a 'golden share' in the largest banks and allow it to voice the public interest when banks determine strategy; 328 reform of the FCA's regulatory perimeter might offer businesses defined as 'small and medium' some protection against egregious bank conduct; 329 reform that introduces a duty of good faith to lending agreements would offer minimum protection to all businesses. 330 These reforms shift the rules governing the conduct of the parties during bargaining: the first two modify corporate law to limit the bargaining power of shareholders; the latter two modify contract law to limit the bargaining power of secured lenders. But none of these options offer borrowers an alternative to remaining in a bargaining situation dominated by 'the monoculture of shareholder-owned banks'. 331 Public banks offer that alternative: if bank lending to creditworthy projects is insufficient, then a public competitor could expand that lending by offering straightforward business banking services to the public, setting standards for price and service in the process. 332 A reformed British Business Bank could perform this role.
Fourth, notice that the British Business Bank is incorporated under the Companies Act 2006. Its sole shareholder is the business secretary, on whose behalf UK Government Investments, the successor to UKFI, acts as a 'shareholder representative'. 333 In contrast to UKFI, UK Government Investments does not have a mandate to promote the sale of the government's holding to outside investors. 334 The absence of outside investors and their expectations frees the British Business Bank from navigating conflicts between the interests of investors and the purpose of the bank. But it must still confront a tension: those who run it must weigh the bank's capacity to channel credit against ensuring accountability for those decisions. 335 With that tension in mind, the government's decision to establish the British Business Bank under the Companies Acts rather than as a statutory corporation is significant, for the former allows for 'the avoidance of legislative influence and control', 336 so that 'the Secretary of State, as "owner" … can exercise comprehensive control … [and] Parliament is … left without an effective voice'. 337 That allocation of decision-making authority matters because it raises again 'the money question: who should control its creation and how it should be used'. 338 Company structures place control of money creation and its use under the influence of bank shareholders, whether external investors or, in the case of public banks incorporated under the Companies Acts, the government. Given what we now know about GRG's misconduct, Vince Cable may have been astute in 2012 when he suggested that the government ought to have converted RBS into a public bank. But the history of public banks has its own stories to tell of dysfunctional financeof incompetent management, interest group capture, and wasted resources. The drama of RBS during and after 2008 suggests that shareholder driven banks cannot be the only or even the dominant form of banking. Might public banking serve as an alternative, to aid rather than hinder the normative aspiration of 'inclusive and stable economic development'? 339 Samuel, John Wightman and Clare Williams. Many thanks also to the two anonymous reviewers. All errors remain my own.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Notes on contributor
Iain Frame is a Lecturer in Law at Kent Law School. He teaches banking law and corporate governance. His research interest is the relationship between law and the monetary system. He has published in the Modern Law Review and the Journal of Law and Society.