RBS report a 'damning document' says Which?FSA admits 'light-touch' regulation flawed

12 December 2011

The failure of RBS in 2008 raised fundamental questions about the whole banking system 

Which? calls for ring fencing of retail banks to reduce future risk as FSA identifies key failings by the bank's senior management and wider systemic weakness which led to RBS collapse. 

A damning document   

Which? chief executive, Peter Vicary-Smith called for government action following the revelations of the FSA report: 'The FSA report is a damning document. It reveals the inherent flaws in a corporate culture that focuses on bonuses and short-term profits. Senior executives have been handsomely rewarded whilst taxpayers are sitting on a £26 billion loss from their stake in RBS.

'The Chancellor must confirm he will take tough action to protect consumers when he publishes his response to the Independent Commission on Banking next week (19 Dec). In particular, he must press ahead with the ring fencing of retail banks. 

'It also has to be made easier to take enforcement action against senior executives when their poor decisions lead to bank failures and risks to consumers. People need to be reassured that this will never happen again and the failure of one bank will not be allowed to put the entire system at risk'.

Poor decisions and underlying weakness   

The FSA report into 'The failure of the Royal Bank of Scotland' in 2008, points to a combination of seven factors: 

  • Significant weaknesses in RBS’s capital position, permitted by an inadequate regulatory framework
  • Over-reliance on risky short-term wholesale funding
  • Concerns and uncertainties about RBS’s underlying asset quality
  • Substantial losses in credit trading activities, which eroded market confidence
  • The ABN AMRO acquisition, which proceeded without appropriate heed to the risks involved and inadequate due diligence
  • An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure
  • Deficiencies in RBS management, governance and culture 

FSA admits failings

Introducing the RBS report, FSA chairman, Lord Turner said: 'The FSA operated a flawed supervisory approach which failed adequately to challenge the judgement and risk assessments of the management of RBS. This approach reflected widely held, but mistaken assumptions about the stability of financial systems and existed against a backdrop of political pressures for a ‘light touch’ regulatory regime.

'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.'

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