Last week the Financial Services Authority announced, following an investigation of management conduct at the Royal Bank of Scotland, that FSA would not bring enforcement proceedings against any individuals. This caused criticism that no “charges” would be brought and no “report” published. Neither criticism is valid. The FSA has not produced, even for internal use, a comprehensive report on the events that led to the public rescue of RBS. 

But the criticism raises two legitimate issues. First, do we understand the causes of the crisis and RBS’s role within it? And second, should executives and directors of failing banks be subject to sanctions, even if they are not guilty of reckless or unprofessional behaviour but solely of poor business judgments? On the first, the causes of the crisis and the role of ill-designed international regulations, poor supervisory practices and bank risk-taking are well understood. In April 2008 the FSA published a report into the Northern Rock failure and set out, more openly than any other financial authority, the inadequacies of our approach. A complete reform of FSA supervisory approaches followed. Then in March 2009 we published the Turner Review, which detailed how globally agreed capital adequacy and liquidity rules were woefully deficient pre-crisis, allowing banks to take dangerous risks.  

The executives and board of RBS made risky decisions, allowed by the rules of the time and applauded by much of the market. They made judgments about the balance of risk and return, which under different circumstances might have served stakeholders’ interests but which in retrospect were poor. But these were not, our investigation shows, made without consideration of relevant information. They were therefore doing what executives and boards in other sectors of the economy do: sometimes getting judgments right and sometimes wrong. Failure in banking, or even the threat of failure offset by public intervention, carries huge economic costs quite different from non-banks. In banking, higher return for higher risks is also sometimes achieved not by socially valuable product innovation, but by leveraging up and taking liquidity risks, increasing the danger that society must clean up the mess. 

Investigations focused on whether individual executives breached rules have a role and the FSA has successfully brought some enforcement cases relating to breaches revealed by the banking crisis. But achieving a general shift in attitudes to risk and return may require that bank directors and executives are made subject to quite different incentives than those that are appropriate in other sectors of the economy.