The Financial Services Authority’s (FSA’s) report has found poor management and board decisions caused the failure of Royal Bank of Scotland.
The City regulator said “deficiencies in the global capital regime and liquidity requirements” made the failure more likely and admitted flaws in its supervisory approach.
It said the failure of the bank could be explained by a combination of six factors, including: “significant weaknesses” in its capital position; over-reliance on short-term wholesale funding; “concerns and uncertainties” about underlying asset quality; substantial losses in credit trading activities; the ABN AMRO acquisition; and “an overall systemic crisis”.
The FSA said “multiple poor decisions” suggested management and board deficiencies could be considered a seventh factor.
Adair Turner, FSA chairman, says: “Banks across the world, including RBS, were operating on levels of capital and liquidity that were far too low.
“These prudential regulations have been changed radically since the crisis, with the internationally agreed Basel III standards.”
He says: “Had Basel III been in place at the time, not only would RBS have been unable to launch the bid for ABN AMRO, but it would have been prevented from paying dividends at any time during the Review Period, i.e. from at least 2005 onwards.”
Responding to the FSA’s flawed supervisory regime, Turner says it had focused on conduct regulation at the time, labelling its prudential supervision of major banks as “inadequate”.
Turner adds: “The report describes a historic approach to supervision, and one that has been radically reformed since 2007. The FSA is a different organisation now.
“We have more resources, better skills, a more intensive approach and far greater focus on capital, liquidity and asset quality.”
The FSA claim that many of the reforms needed in response to the report have already been implemented.
However, Turner has called for regulatory approval for future major bank acquisitions and for a public debate about changes to rules, laws or remuneration policies that ensure bank executives and directors “face personal consequences as a result of bank 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.”
He says banks are “different” because excessive risk-taking “can result in bank failure, taxpayer losses, and wider economic harm”.
Turner adds: “Their failure is a public concern, not just a concern for shareholders.”
He says either a “strict liability” approach to impose fines or bans should be employed; or an “automatic incentives-based approach” with rules banning senior executives and directors of failed banks from future positions of responsibility, or major changes to remuneration ensuring “a very significant proportion of pay is deferred and forfeited in the event of failure”.
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