Poor management decisions and the last government's light-touch regulatory regime were key factors in the near-collapse of Royal Bank of Scotland (RBS), a long-awaited report by the City watchdog said today.

The Financial Services Authority (FSA) highlights deficiencies in the management, governance and culture at RBS and says the deal which effectively broke the bank, the £50 billion takeover of Dutch bank ABN Amro, was carried out with inadequate due diligence.

Key Points

  • FSA releases report on near-collapse of RBS
  • It highlights poor management decisions by RBS
  • But FSA also highlights its own short-comings

However, the FSA also highlights its own short-comings in the lead-up to the collapse, saying it operated a flawed supervisory approach which failed to challenge the management of RBS.

It adds: "This approach reflected widely-held, but mistaken assumptions about the stability of financial systems and existed against a backdrop of political pressures for a 'light touch' regulatory regime."

The key problems

The FSA identified six key factors in the failure of RBS. They were:

  • Significant weaknesses in RBS's capital position, as a result of management decisions and permitted by an inadequate global 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. The file on the Dutch bank amounted to "two lever-arch folders and a CD".
  • An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.

The FSA says the seventh key factor in explaining the bank's demise was the management, led by chief executive Sir Fred Goodwin.

It says: "The multiple poor decisions that RBS made suggest that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions."

Future action

Today's report includes a recommendation that banks should gain regulatory approval for significant acquisitions and asks whether bank directors should be forced to prove their innocence in the event of a future failure.

However, it confirms that the FSA does not intend to pursue any new enforcement action against any of RBS's former directors.

FSA chairman Adair Turner says: "The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?"

The report notes a speech made in 2006 by Treasury secretary Ed Balls, now shadow chancellor, in which he said "nothing should be done to put at risk a light-touch, risk-based regulatory regime".

Turner adds: "The report describes a historic approach to supervision, and one that has been radically reformed since 2007. The FSA is a different organisation now.

"We have more resources, better skills, a more intensive approach and far greater focus on capital, liquidity and asset quality."

Series of 'bad decisions'

RBS expanded aggressively under the eight-year leadership of Sir Fred, who was replaced by Stephen Hester after the bank needed a Government bailout that left it more than 80% taxpayer-owned.

It was swelled by a series of acquisitions, including Natwest in 1999 and US bank Charter One in 2004 and by the time of its collapse its balance sheet was bigger than the entire UK GDP.

The regulator said in a 300-word report released last December that it found no evidence of fraud or dishonest activity in the lead up to the crisis, although the bank made a series of bad decisions.

Today's report runs to 452 pages and was made public following pressure from the Treasury Select Committee, which said the original statement summing up the results of the FSA investigation failed to answer important questions or show that lessons had been learned.