FSA admits RBS failings and calls for tougher penalties for bankers

The FSA has admitted it had a significant part to play in the near collapse of Royal Bank of Scotland in 2008.

In its report, published today, the FSA says its supervisory approach into the bank “provided insufficient challenges to RBS”.

The regulator says there were six factors which almost led to the demise of RBS in the midst of the 2008 financial crisis. Among them were concerns and uncertainties about its underlying asset quality, which were subject to little fundamental analysis by the FSA as well as concerns and uncertainties about RBS’s strategy. The FSA also says it underestimated how bad the losses associated with structured credit might be.

The report highlights poor management decisions such as the acquisition of ABN Amro. FSA chairman Adair Turner says had Basel III been in place RBS would not have been able to launch its bid for ABN Amro as well as being unable to pay dividends at any time during the review period. He says the FSA is a completely different organisation to what it was in 2007, with far more resources and skills.

Turner has called for new powers to be introduced in a bid to prevent a collapse of this nature happening in the future. These include stricter rules that would mean heavier fines and bans should a bank fail as well as an automatic incentives based approach, which includes preventing senior directors and executives of failed banks from future positions of responsibility or changes to remuneration to ensure that a very large proportion of pay is deferred or forfeited in the event of a failure.

Turner says: “The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?

“In a market economy, companies take risks on behalf of shareholders and if they make mistakes, it is for shareholders to sanction the management and board by firing them. But banks are different, because excessive risk-taking by banks, for instance through aggressive acquisitions, can result in bank failure, taxpayer losses, and wider economic harm. Their failure is a public concern, not just a concern for shareholders.

“We should, therefore, debate policy options to ensure that bank executives and boards strike a different balance between risk and return than is acceptable in non-bank companies.”

RBS is now 83 per cent owned by the Government and has seen thousands of job losses since the crisis.

Six factors are deemed to have led to the collapse of RBS:

– significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework;

– over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity;

– concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;

– 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;

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

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