Royal Bank of Scotland Group Plc became the third European bank to close its structured products business for retail investors since March, citing high capital costs and expenses for the securities.
The closure is part of Edinburgh-based RBS’s attempts to pare its investment bank’s balance sheet by a fifth to 80 billion pounds ($125.3 billion) by the end of 2014. Britain’s biggest government-owned lender is seeking to cut costs, withdraw from less profitable businesses and has started to eliminate 2,000 jobs.
Dutch lender Rabobank Groep said it was closing its equity derivatives unit in March because new regulations for selling structured notes to wealthy individuals involve increased costs. Switzerland’s Basler Kantonalbank said last week it will issue no more structured products because rules governing the products reduced their profitability.
“If you want to have a structured products business you have to be all in, you have to commit,” said Russell Catley, co-founder of London-based structured investment consulting firm Catley Lakeman Securities and former head of equity derivatives for U.K. and Ireland at Citigroup Inc. “Like Rabobank recently, although for different reasons, RBS probably saw the business as a distraction and not core to its operations.”
“We will de-emphasise some of the more complex structured products that are capital intensive or costly to run,” Peter Nielsen and Suneel Kamlani, co-CEOs of RBS’s markets business, said in a statement.
RBS’s equity derivatives and structured products businesses could be sold and the bank will maintain its obligations on outstanding securities, acccording to the statement.
Regulators in the U.S. and Europe are seeking to increase transparency for structured products after they came under scrutiny following the financial crisis in 2008 for being opaque and overly complex. Rules requiring banks in the European Union to provide concise information outlining the characteristics and risks of the products they sell could be in place by the end of 2014, according to the European Commission.
RBS said its decision to shutter its equity derivatives business is designed to protect its fixed income business, which includes its foreign exchange and asset-backed products.
The bank has about 50,000 structured products outstanding tied to commodities, currencies, equities, interest rates and proprietary indexes, according to its website. Martijn van Pieterson, RBS’s global head of derivative products and solutions and counterparty exposure management, ran the businesses that will be closed.
Adam Durchslag, a spokesman for RBS in London, declined to comment on jobs losses related to the closure of its businesses.