By Simon Miller

The Financial Services Authority (FSA) has admitted flaws in its supervisory approach to the near-collapse of the Royal Bank of Scotland (RBS).

Despite concerns and uncertainties over RBS’s underlying asset quality was subject to fundamental analysis by the regulator according to the long-awaited report on the failings of the bank.

The report concluded that poor management decisions created a significant weakness in RBS’s and an over-reliance on risky short-term wholesale funding was permitted by an inadequate approach to the regulation of liquidity.

In addition, with substantial losses in credit trading activities, both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be.

The report added that the purchase of ABN Amro, which held massive sub-prime mortgage positions, was carried out without appropriate concerns over the risks involved and a failure in due diligence.

In addition, the multiple poor decisions that RBS made suggest, moreover, that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions. The report concluded that these underlying deficiencies should be considered as a key factor in explaining RBS’s failure.

FSA chairman, Adair Turner, said: “People want to know why RBS failed and why no-one has been punished. This report aims to answer those questions. It describes the errors of judgement and execution made by RBS executive management which, in combination, resulted in RBS being one of the banks which failed amid the global crisis. These were decisions for whose commercial consequences the RBS executive and Board were ultimately responsible.”

He added: “In addition, the report concludes that the FSA was too focused on conduct regulation at the time and its prudential supervision of major banks was inadequate. The FSA 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.”

Turner proposed two key policy areas for change. Firstly, he recommended that major bank acquisitions should in future, require explicit regulatory approval. And secondly, he called for a public debate about changes to rules, laws or remuneration policies which would ensure that bank executives and directors face personal consequences as a result of bank failure.

The full report into the failure of RBS, the Foreword by Adair Turner and the Executive Summary are available on the FSA’s website.

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