FSA Blame ‘Poor Decisions’ for RBS Failure

The FSA has published a report which concludes that the Royal Bank of Scotland’s failure in 2008 was due to poor decision-making. The report, called The failure of the Royal Bank of Scotland: Financial Services Authority Board Report, was published on December 12^th 2011. 

It examines the causes of the bank’s failure, which led to its part-nationalisation, and analyses what lessons may be learned for the future of the banking regulatory system.

It is a detailed and lengthy report of 452 pages, so I will give you a brief summary. Six main reasons are cited for the failure:

1. Significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework

2. Over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity

3. Concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA

4. Substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be

5. The ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence

6. An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank

The latest bad news from RBS is the announcement, on Jan 10 2012, of a further 4,000 redundancies. As if losing your job is not bad news enough for beleaguered RBS staff, the announcement came hard on the heels of rumours of a £4 million bonus for boss John Hourican, the head of RBS' investment banking arm.  Rather a slap in the face for the many hard-working employees about to lose their jobs.

The report also criticises the FSA’s own flawed supervisory approach as an ‘inadequate approach’ and ‘insufficient challenge’.  The FSA are paying the price for their own inadequacy, however, as they are due to be abolished and replaced by two new regulators, a Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).

FSA Chairman Adair Turner called for banking rules to be changed, as three years down the line; no-one has yet been held accountable the RBS disaster.  The report concludes that before the crisis, global standards for bank capital and liquidity were far too low.   If Basel III had been in place in 2008, it might have been a different story for RBS.

Says Adair Turner

 “Had Basel III been in place at the time, not only would RBS have been unable to launch the bid for ABN AMRO, but it would have been prevented from paying dividends at any time during the Review Period”.

More proof, as if we needed it, that the sooner the new Basel III Regulations are implemented the better for the banking industry, investors, banking employees, business, and for us all.