There is a good case for RBS being the most complex regulatory failure in UK history. And while, unlike Northern Rock, it has been endlessly pored over since 2008, the temptation to view it through the lens of Fred Goodwin has often seemed irresistible. Indeed, it is hard not to see the FSA’s inability to hold the RBS Chief Executive to account as the ultimate origin of SMCR.
To try to redress this balance slightly, and see RBS in a wider context, this blog looks at four broader factors that played a part in RBS’ failure and what it might mean for SMCR in practice.
1. UK competitiveness: This wasn’t an FSA objective and isn’t an objective of the PRA or FCA. But the FSA was obliged to take account of it (as a “principle of good regulation”) and it remains a lively aspect of regulatory debate. The Chancellor’s declaration, a few years back, that the UK was “open for business” is an obvious example, as is some of the rhetoric around Fintech.
It’s important, therefore, to see RBS’ merger with NatWest in 2000 and its subsequent growth in this context. It was an era of universal, “bulge bracket” banks, and there was a palpable desire to have a UK player at this level, alongside the US, Germans and Swiss, a good deal of public cheerleading behind the RBS story.
2. Banking sector consolidation: If Northern Rock was a child of demutualisation, RBS was the product of banking consolidation. By the end of the 1990s, both RBS and Bank of Scotland, were perceived by the market as needing to grow to survive, probably by acquisition. Both attempted to merge with NatWest, RBS coming out on top partly due to its greater promise of cost synergies and its consequently higher profit predictions. The assumptions and expectations created at this time set the tone for much of what happened subsequently.
3. Financial innovation: This has been considered in detail elsewhere – the Turner Review is still probably one of the best assessments and certainly one of the best reads. In the context of RBS, it’s worth noting that its investment banking arm came largely from Nat West Markets and must have needed significant assimilating, The consequent challenges raise questions for RBS’ Board and shareholders as well as its management.
4. “Regulatory red tape”: It would be wrong to make too much of this but it’s important to note the prevailing political mood of the time was that regulation was a necessary evil at best, and that less was more. This extended across the political spectrum and produced a range of initiatives, notably the Better Regulation Executive. This atmosphere undoubtedly had an influence on the FSA and the industry, and probably shifted the regulator’s relationship with the largest institutions such as RBS. Incidentally, post crisis, this debate is again starting to emerge, particularly in the context of Brexit.
These strands come together in RBS’ purchase of ABN AMRO’s investment banking business in late 2007, which took place after Northern Rock and, often forgotten, after Barclays’ earlier rival bid had been seen off.
None of the above diminishes the accountability of RBS’ senior management. But, looking again at the RBS story with a longer-term perspective, it is evident how wider forces were at work and how visible RBS’ activities were. Whatever the application of SMCR might have been, much of what RBS management did was in plain public view, and little of it was confined to RBS alone.
In a long-awaited 452-page report into what went wrong at Royal Bank of Scotland, Lord Turner, chairman of the FSA said that the public wants to know how the bank failed and why no one has been punished.