ROYAL BANK of Scotland’s (RBS) multibillion losses were exacerbated by a 2006 decision of the bank’s board, including Irishman Peter Sutherland, to expand its investment banking operations “aggressively”, according to a major report published yesterday.
In a 500-page report, the UK’s Financial Services Authority heavily blamed itself for failing to properly regulate the rapidly-expanding bank, but also criticised the “light touch” regime ordered by the Labour government.
Authority officials decided last year there were “not sound grounds to bring enforcement action” against RBS directors, who were sometimes left without sufficient information by executives.
However the report said chief executive Fred Goodwin’s “assertive and robust” management style was flagged as a potential risk to RBS as early as 2003.
The report added it is “a separate issue” for the British Department of Business, Innovation and Skills to decide whether disqualification proceedings should be brought against any of the directors at the time.
The Edinburgh-headquartered bank entered the global credit crisis with extensive reliance on both short-term and overnight and unsecured wholesale funding: “Once the crisis had started, it was difficult for RBS to improve its liquidity position significantly.”
It went on: “With hindsight, RBS’s capital before the crisis was grossly inadequate to provide market assurance of solvency amid the general financial crisis of autumn 2008. RBS entered the crisis with extensive reliance on wholesale funding.”
Acknowledging that “banks are run by people”, the report said it “is only with hindsight that it is clear that there were specific decisions taken by the RBS board and senior management” that placed RBS more at risk. These included decisions to keep RBS lightly capitalised in order to maintain an “efficient” balance sheet, to be highly dependent on wholesale funding, along with expanding commercial real estate lending “with inadequate monitoring”.
Furthermore, the board and management had rapidly increased all types of lending, eroding the bank’s capital resources, expanded its structured credit business in 2006 and early 2007 when signs of underlying deterioration “were already starting to emerge”.
Once credit markets ran into trouble from early 2007, “RBS, like many others, was by then holding positions which were bound to suffer some loss”, but it was “among the less effective banks in managing its positions through the period of decline”.
Describing the purchase of the Dutch bank, ABN AMRO, by a three-strong consortium led by RBS as “extremely risky”, the authority said it “greatly increased RBS’s vulnerability”, since it increased its exposure to sub-prime losses. The RBS board’s decision to sanction the contested takeover bid was “defective” and had not been “sufficiently sensitive to the wholly exceptional and unique importance of customer and counter party confidence in a bank”.
However, the authority’s report acknowledged that RBS could not have carried out a full due diligence of the Dutch bank since this was “the inevitable result of making a contested takeover, where only limited due diligence is possible”.
“The acquisition significantly increased RBS’ exposure to structured credit and other asset classes on which large losses were subsequently taken. In the circumstances of the crisis, its role as the leader of the consortium affected market confidence in RBS.”
Proposing greater powers for regulators in future takeover deals, the authority said the existing legislation “did not and does not now make it possible for bidders to insist on more thorough due diligence than RBS conducted”.
