The FSA has held its hands up over the RBS debacle.

The bank nearly collapsed in 2008 due to underlying deficiencies in management, governance and culture which made it prone to poor decisions. In addition, the FSA’s supervisory approach was flawed and provided insufficient challenge to RBS, the watchdog’s long awaited report says. Published today, it adds that deficiencies in the global capital regime and liquidity regulations made the crisis much more likely.

The report concludes that the failure of RBS can be explained by a combination of six factors:

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, which was permitted by an inadequate approach to the regulation of liquidity;

concerns and uncertainties about the bank’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; and an overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure.

FSA chairman, Adair Turner, comments: “The FSA was too focused on conduct regulation at the time and its prudential supervision of major banks was inadequate. It operated a flawed supervisory approach which failed adequately to challenge the judgement and risk assessments of the management of RBS. 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.”

He 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.”

The full report can be downloaded at: http://www.fsa.gov.uk/pages/Library/Other_publications/Miscellaneous/2011/rbs.shtml

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