As a result of a request to the FSA by the Treasury Committee, the FSA has today published a report into the failure of RBS in 2008, and on its own conduct with respect to it.
The FSA’s report concludes that RBS’s failure ultimately resulted from poor decisions made by the RBS management and Board.
But deficiencies in the global capital regime and liquidity regulations made the crisis much more likely.
In addition, flaws in the FSA’s supervisory approach provided insufficient challenge to RBS.
Specifically, the report concluded that the failure of RBS could 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 Treasury Committee took steps to ensure that the FSA's report into its own actions could be relied upon. It appointed two independent experts, Sir David Walker and Bill Knight, to review the FSA's report before publication on behalf of the Committee, and to report to the Committee on their findings.
This is the first time that a parliamentary committee has sent its own specialist advisers into a non-departmental public body in order to scrutinise its actions.
The Chairman of the Treasury Select Committee, Andrew Tyrie MP, commented: "The public was being brushed off with a single page of explanation from the FSA about the failure of RBS in exchange for the billions of pounds taxpayers put at risk to save the bank from collapse.
"This was unacceptable.
"We have taken steps to ensure that the public will now be offered a comprehensive analysis of what went wrong at RBS, and also how well the FSA has handled the RBS issue, in 2008 and since.
"We have also worked to ensure that the FSA report will be a balanced assessment of events, including the FSA's own actions.
"We will need to digest the FSA's report fully before commenting on in detail on the report."
FSA chairman, Adair Turner, 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.
“The report also reinforces the conclusion that the global capital standards applied before the crisis were severely deficient and liquidity regulation was totally inadequate.
“In addition, the report concludes that the FSA was too focused on conduct regulation at the time and its prudential supervision of major banks was inadequate.
“The FSA operated a flawed supervisory approach which failed adequately to challenge the judgement and risk assessments of the management of RBS.
Many of the reforms required in response to the lessons highlighted in this report have already been implemented. But in addition, Adair Turner proposed two key policy areas where further significant change should be considered. Firstly, he recommended that major bank acquisitions should in future, require explicit regulatory approval. And secondly, he called for a public debate about changes to rules, laws or remuneration policies which would ensure that bank executives and directors face personal consequences as a result of bank failure.
