The report into the failure of Royal Bank of Scotland (RBS) points to poor management decisions at the bank and flawed regulatory supervision from the Financial Services Authority (FSA).
RBS failed largely as a result of their takeover of parts of the Dutch bank ABN Amro.
This flawed takeover process cost RBS £49bn just as the global financial crisis was taking off in 2007.
Critical of their own role in the banks’ failure, the FSA admitted to having “provided insufficient challenge” to RBS during the takeover process.
The findings of this report are important because of the massive costs incurred by the taxpayer.
It cost us £45.5bn to bailout RBS, resulting in 83% of the bank now being owned by the government. The taxpayer continues to hold a £25bn loss on its investment in RBS.
At some point next year, the regulation and supervision of banks will move from the Financial Services Authority to the Bank of England.
We hope that the Bank is already planning to implement some of the learning points from the report into the failure of RBS.
Lord Turner, chairman of the FSA, has recommended two measures for regulation of banks in the future.
He recommends a ‘strict liability’ approach, which would make it more likely that the failure of a bank was followed by enforcement measures by making one or more individuals personally responsible for their decisions.
He also recommends that senior executives involved in banking failures are automatically banned from future positions of responsibility. This move would also see changes to remuneration arrangements, so a large part of pay was deferred and could be withdrawn in the future.
Whilst these changes could help to introduce greater levels of personal responsibility in the banking sector in the future, those who were hoping for personal accountability at RBS or the FSA today are likely to be disappointed with this report.
One good outcome from the report could be a change to the risky, short-term profit creating culture in place at our High Street banks, to be replaced with a culture better aligned to the interests of customers and the taxpayer.
This type of cultural change takes time, assuming it is accepted by those who will need to implement the change.
Photo credit: Flickr/0olong
