Bill Jamieson: ‘Silent witness’ report reveals cause of RBS’s demise

IT MAY lack a blood-stained knife and victims sprawled on the floor. But the report into the RBS debacle is a forensic analysis, every bit as chilling as those TV crime series based on relentless analysis of decomposing remains.

RBS failed through a lethal combination of sub-prime debt blindness, a hopelessly mistimed and under-researched hostile takeover bid which stretched the bank’s capital ratios, and an internal system of supervision and risk controls that failed abysmally.

The cost of these failures were colossal. They extended well beyond the near total wipe-out of the investments of tens of thousands of shareholders. The government had to inject £45 billion of equity capital for an 83 per cent equity stake. This has now shrunk in value to £20bn. As the report notes, larger costs arose from the recession that resulted from the banking crisis.

There was no inkling of any problems afoot in the 2006 or 2007 annual reports – both of them expansive documents. The report reveals why. RBS’s capital position was far weaker, in terms of its ability to absorb losses, than its published total regulatory capital resources suggested. This reflected a definition of regulatory capital that was “severely deficient, combined with an RBS strategy of being lightly capitalised relative to its peers”.

The whole banking system, but RBS in particular, was excessively dependent on short-term wholesale funding. Regulatory and supervisory frameworks were deficient “with a seriously flawed liquidity regime to measure, monitor and limit firms’ liquidity risks”. There were also asset quality concerns and uncertainties arising from the group’s aggressive growth in the 2000-2007 period. It was blithely assumed that, because the 2000 acquisition of NatWest had gone so well, all others would follow a similar benign trajectory. The full extent of lending losses did not materialise until later – £14.1bn of loan impairments taken in 2009 and a further £9.1bn in 2010.

The ABN Amro acquisition was the final killer cherry on this toxic cake. It greatly exposed the bank’s exposure to risky trading assets. RBS’s share of the cost was financed by €4.3bn in RBS shares and €22.6bn cash, of which the majority was funded by debt, and no less than €12.3 bn of this was payable in one year or less. What testimony to the gullibility of fellow directors, internal risk monitors, analysts, institutional investors and ordinary shareholders, assured to the last that the bank had ample capital.

Only one director has been sanctioned, the FSA’s enforcement division concluding there were minimal chances of success, given such cases need clear evidence of actions “that were incompetent, dishonest or demonstrated a lack of integrity.”

The report does not spare the FSA itself from severe criticism. It finds the key prudential regulations applied by it (and other agencies around the world) were “dangerously inadequate”. If the RBS board has got off lightly, then so too, surely, has the FSA.

• Download the full FSA report on RBS