Failure of risk management at RBS was 'obvious to all' - chief executive

Published on Wednesday 25 November 2009 13:16

PROBLEMS at the Royal Bank of Scotland were "obvious to all" before the financial crisis took hold, the group's chief executive said today.

• Stephen Hester (right) sits next to RBS chief economist Andrew McLaughlin at Holyrood's Economy Committee today

Stephen Hester, who took over from former boss Sir Fred Goodwin after the banking crash, said the RBS balance sheet was "too big and too vulnerable".

Mr Hester appeared before MSPs at Holyrood in an investigation into the banking sector.

Asked what differences there are to risk management now, compared with Sir Fred's tenure, he said: "I'd like to avoid personalising things, I wasn't there in the past, so my observations by necessity have some limitations to them.

"But I think that the real issue around risk management, not just in RBS but in Scotland and the financial crisis around the world generally, was that what was missed was obvious to all, and that's its tragedy.

"The failure of risk management was macro risk management, as opposed to things that were hidden in drawers, not visible.

"That is not to say that things hidden in drawers and not visible should not be risk-managed, that's an incredibly important part of any bank."

He added: "It wasn't detailed risks that made RBS particularly weak, it wasn't detailed risks that made the banking system weak, it was the big macro imbalances.

"In the case of RBS, it had a balance sheet that was too big, too vulnerable and it was not supported by adequate capital."

He said the crisis at the bank and elsewhere had "stark contributing factors".

The bank's problems were "on full view to everyone", as were the global problems which led to the recession.

Mr Hester was at the Scottish Parliament the day after it emerged that RBS and HBOS, Scotland's two banking giants, were lent almost 62 billion at the height of the crisis last year.

The money was lent by the Bank of England weeks after the collapse of Lehman Brothers to buy time until the UK Government took action.

Mr Hester opened today's session with a statement to the Economy Committee.

He claimed there was a sense of "loss" in Scotland when the two banks were caught up in the economic crisis and described RBS as "part of the fabric" of the community.

Mr Hester said he is "grateful" for the support of the state, adding: "With that support comes serious responsibilities. The first of those responsibilities is that we should continue to serve our 40 million customers around the world. That includes the customers here in the UK and Scotland.

"The second is that whilst doing that, we must return ourselves as quickly as we can to standalone financial strength so we do not need state support anymore, or again.

"Thirdly, we must rebuild the value of this institution so that the taxpayers are able to sell those shares at a profit in future and thereby complete the circle of recovery."

Mr Hester said he also realises the need to participate in the wider debate.

"We are unfortunately politicised and some of the political kicking that comes with that can damage us and the taxpayers' interest and delay our return to health."

Mr Hester told the committee that RBS received 45 billion of capital support from taxpayers and is 70% state owned.

The RBS restructuring programme is the "largest and most far reaching" among any of the banks which were engulfed in the recent crisis.

Asked about the Scottish credentials of the bank, Mr Hester said it is headquartered in Edinburgh and has a "cultural" link with Scotland that it did not have anywhere else.

But when asked by SNP committee member Rob Gibson where the bank's top executives lived, Mr Hester said RBS was run like most "multi-national" companies around the world.

He said: "To be successful, you must serve your customers and that means having people where your customers are."

Of the bank's 14 million customers, 1.7 million of these were in Scotland, he said.

He also told MSPs that a 75 million technology investment is to be made in Edinburgh which will see it retain many "high-value" jobs in the city and create a small number of posts.

About 800 Scottish jobs have been lost at RBS since the crisis emerged, of these about 110 were compulsory redundancies.