The long awaited report by the Financial Services Authority (FSA) into the failure of the Royal Bank of Scotland (RBS) finds that there are six, maybe seven reasons for the collapse.

What it amounts to is a perfect storm of bad decisions, systemic risk and regulatory failure.

The FSA report, which it had been forced to make by the Treasury Select Committee, says that the six major factors were as follows:

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 seventh factor to be considered is ….that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions’.

RBS-Sebastian Ballard

RBS-Sebastian Ballard

The report says that although poor decisions were made there are no grounds to hold anyone particularly accountable. It also says that the FSA as regulator was too busy looking at conduct regulation with the result that its prudential oversight was ‘inadequate’.

It goes on to say that had the new ‘Basel III’ rules been in place at the time then not only would RBS have been unable to launch a bid for ABN AMRO it would also not have been in a position to pay out shareholder dividends since at least 2005.

Adair Turner, the FSA Chairman, said:

People want to know why RBS failed and why no-one has been punished. This Report aims to answer those questions. It describes the errors of judgement and execution made by RBS executive management which, in combination, resulted in RBS being one of the banks which failed amid the global crisis. These were decisions for whose commercial consequences the RBS executive and Board were ultimately responsible.

It describes, however, why the FSA’s Enforcement Division concluded that there was not sufficient evidence to bring enforcement action which has a reasonable chance of success in Tribunal or court proceedings.

He also concluded that “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?

Image: Sebastian Ballard [CC-BY-SA-2.0 (], via Wikimedia Commons

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