UK: the failure of RBS - FSA report published

The Financial Services Authority today published its report into the failure of Royal Bank of Scotland: see here (full report, pdf) or here (links to report chapters). The report concludes that six factors contributed to the failure of RBS:

• Significant weaknesses in RBS’s capital position, as a result of management decisions and as permitted by an inadequate regulatory capital framework;
• Over-reliance on risky short-term wholesale funding;
• 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.

Part 2 of the report - see here (pdf) - is titled "Management, governance and culture" and in this part of the report the FSA concludes that it is highly probably that aspects of RBS's management, governance and culture played a role in the failure of the bank. In his Foreword, Lord Turner, the chairman of the FSA, states that there is a strong public interest in ensuring that bank executives and boards reach a different balance between risk and return than would be acceptable in non-bank companies, which suggests that directors and boards should face different personal risk return trade offs compared with non-bank directors and boards. One suggestion made in this regard is the introduction of a strict liability regime for the adverse consequences of poor decisions.