FSA Board publishes report into the failure of the Royal Bank of Scotland (RBS)

12 December 2011

The Financial Services Authority (FSA) Report concludes that RBS's failure amid the systemic crisis ultimately resulted from poor decisions made by the RBS management and Board.

Specifically, the Report concludes that the failure of RBS can be explained by a combination of six factors:

• 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.

The multiple poor decisions that RBS made suggest, moreover, that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions. The Report, therefore concludes that these underlying deficiencies should be considered as a seventh key factor in explaining RBS’s failure.

FSA chairman, Adair Turner, said: “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."

Full Report

© FSA - Financial Services Authority