At the end of 2008, with total assets of over $3.5 trillion, the Royal Bank of Scotland (RBS) was the largest bank in the world by assets and the fifth largest by market capitalisation. The failure of RBS in October 2008 gave rise to what HM Treasury (HMT) has described as "the biggest bail-out in history." The Government injected £45.5 billion of equity capital and £282 billion of taxpayers' money was exposed via the Asset Protection Scheme. Following an enforcement process that began in March 2009, the Financial Services Authority (FSA) concluded in December 2010 that the issues investigated did not warrant it taking any enforcement action. It announced this in a one-page press release. The FSA, following pressure from the Treasury Committee, produced The failure of the Royal bank of Scotland: Financial Services Authority Board Report in December 2011.
The focus of the Treasury Committee's Report has been to identify areas that may merit further legislative or regulatory change. Our Report also considers the value of the reporting process for understanding the causes of RBS's failure and for ensuring that appropriate lessons have been learnt.
The FSA Report describes a series of failures and misjudgements in supervision ranging from the failure to analyse and understand balance sheet risks relating to capital, liquidity and asset quality, to the decision not to intervene in RBS's calamitous acquisition of parts of ABN AMRO. The failures described in the FSA's Report amount to a serious indictment of senior management not only at RBS but also at the FSA.
The FSA argues that since 2008 it has radically reformed its approach to supervision of large firms. It points to the significant increase in resources devoted to the supervision of high impact firms, a much greater focus than previously on capital and liquidity adequacy and asset quality, and the employment of a more intensive and intrusive style of supervision. The Government and Bank of England should closely examine the changes made at the FSA since 2008 and endeavour to preserve positive features of the post-crisis reforms at the FSA when transferring responsibility for prudential regulation to the Prudential Regulation Authority.
In the absence of pressure from the Treasury Committee the FSA would not have produced this Report into the failure of RBS. This should not have been the case. The Board, and especially the non-executive Directors of the FSA, should have ensured that a comprehensive Report on the failure of RBS was produced without the need for Parliamentary intervention. We expect the non-executive Directors of its successor regulators, the Prudential Regulation Authority and the Financial Conduct Authority, to play a more robust role in ensuring that the two bodies review their own decisions and fulfil their duty to assume accountability for their actions to the public and to Parliament, consistent with the Treasury Committee's previous recommendations in our Reports on Accountability of the Bank of England and the Financial Conduct Authority.