Bill Jamieson: Late bank report to the rescue

Why were there no warning flares as the SS RBS steamed to the rocks while FSA stood watch

ON MONDAY the Financial Services Authority (FSA) will finally publish its report into the collapse of Royal Bank of Scotland. The delay has been scandalous. It is more than a year since the report was completed, and three years since the bank foundered. Why have we had to wait this long for an official account of the demise of Scotland’s biggest company and one of the biggest banks in the world?

The collapse was staunched by a government rescue financed by £45 billion of taxpayer funds – the biggest ever rescue in UK corporate history. Tens of thousands of shareholders suffered a near total wipe-out of their investment. That the collapse occurred just a few months after they were tapped for an additional £12bn through an emergency rights issue adds to the sense of fudge and complacency by the regulators. Arguably as costly as the pounds and pence has been the reputational damage to British banking and to Scotland’s standing as a country that was good at banking. Three years later, and with shares in RBS back down to a derisory 21.8p, we are still left wondering: what went wrong, and why?

A near 500-page account was undertaken on behalf of the FSA by PricewaterhouseCoopers. It has taken more than 18 months. It has cost more than £7 million. So why no publication? A year ago the FSA sought to excuse away non-publication – nothing to do, of course, with the fact that the FSA itself was the principal body responsible for oversight of Britain’s banks.

A reality check is necessary here: who funds the FSA? Who provided the wherewithal for that PwC report? From whose pockets was the £45bn rescue money extracted? Who continues to bear a thumping loss on that equity injection? And to whom is a full and serious explanation owed? Everyone who is reading this, I’d say, and millions more. Finally, after intervention by the Treasury Select Committee, a version of the report is now to be published. This much is welcome. But it is as much what is not in this account as what is that will be of keen public interest.

The passage of time should, I hope, have added some maturity and insight into the causes of this debacle. We have to move on from the easy if emotionally satisfying heaping of all blame onto Sir Fred Goodwin. As chief executive he, of course, shoulders ultimate responsibility and must carry the can. But lynch mob judgment has reigned for too long. This was a fault that went deeper than one man and his failings. The account needs to set out the broader shortcomings within the bank, in particular the investment banking division under Johnny Cameron and the circumstances surrounding the FSA’s decision to bar him from future positions of significance in the financial sector.

There was the failure to read the warning signs over the developing sub-prime crisis in America – and the communication of the worsening crisis to the board. And there was the evident danger to the group’s capital buffers posed by the £61bn acquisition of ABN Amro which proceeded on the basis of “express delivery” due diligence.

Then there is the failure of the regulatory system itself – the FSA and the Bank of England – evident in the absence of any warning flares whatever as the SS RBS sailed full steam to the rocks.

Goodwin has been the easy patsy. But here some balance is due. Some two years after the disaster I found myself reading an outstanding article in defence of investment banking. It was written by John Varley, chief executive of Barclays. I was cutting this out when my fingers suddenly froze on the scissors. Was this not the same John Varley who had triggered the takeover battle for ABN Amro? Who had pursued this bid with resolve and tenacity? Who even offered to move his corporate headquarters to Amsterdam? The very same.

In the event, the counter-bid for RBS prevailed because of a weakening of the Barclays share price in the final days of the bid. Without this caprice of the markets, Varley would have had to carry the can and the board of RBS might have been spared the appalling imbroglio that followed.

Remember also the era that led up to this. For a decade and more there was a climate of near-paranoia within RBS about the group’s vulnerability to a takeover. This helped compel the acquisition of National Westminster and a chain of smaller acquisitions through the decade. The urge to keep buying and keep moving was driven in large part by a fear that, if you stood still in global banking at that time you could be vulnerable to predatory attack.

Remember also that throughout this period RBS enjoyed, with a few honourable exceptions, the overwhelming backing of fund managers, stockbrokers’ analysts and investment institutions, right up to and including the ABN purchase. Gongs, medals and awards rained down on Sir Fred.

Finally, and crucially, bear in mind the collective responsibility of the bank’s directors and that of the group’s internal and external auditors. There are also searching questions over the elaborate machinery of internal risk reporting, audit vetting and management. Here is the heart of the failure. The 2007 annual report, running to 252 pages, carried on page 72 a proud statement that the FSA had approved a waiver arrangement whereby RBS “will be one of a small number of banks whose risk systems and approaches have achieved the advanced standard for credit, the most sophisticated available, under the new Basel II framework”. How absurd that sentence reads now. Post the ABN acquisition, its audit and risk committees in this report ticked all the boxes and reported nothing untoward. It turned out in retrospect to be an annual report worthy of a Booker prize for fiction.

Since then blows have rained down with barely a break: economic downturn, write-downs on Irish debts, payment protection provision and now the eurozone sovereign debt crisis. Underlying progress has been hard to discern. But the group has since knocked more than $1 trillion in assets off its balance sheet including the sales of, or exit from, businesses in 25 countries. Its Tier 1 capital is up from a low of 4 per cent to 13.1 per cent. And its loan to deposit has fallen from 154 per cent to 112 per cent – reducing substantially reliance on wholesale funding markets. But what this scandalously delayed report must convincingly set out is how such a mis-reading of markets and under-appreciation of risk arose – both by the regulators as well as the bank – and the rectification undertaken. Until all this is out, there can be no closure.