Do as i say, Not as i do!

Over the last week I have been investigating the actions (or lack of!) of the FSA over the past decade, I have read a number of official publications published by the FSA and my conclusions from reading these leave me as bewildered to the issue than I was before I started.  The article I am going to talk about is the FSA’s publication on the collapse of RBS, “The Failure of the Royal Bank of Scotland” December 2011, www.fsa.gov.uk/pubs/other/rbs.pdf.  

It is well documented the rise and fall of the RBS, whether it be the actions of Sir Fred Goodwin or the acquisition of ABN AMRO, it is clear that much bitterness is held against said collapse and the generalised populous, as tax payers, feel hard done by.  It is clear from media coverage that there are a vast array of people who are held accountable for the current economic crisis, and from reading the above publication it is little wonder why. 

The FSA’s publication attempts to answer a varying number of questions in a long winded and tiresome 452 page statement (the cynic in me believes it is that long to stop people reading it!).  However if you dig deeper into the article it does find a number of interesting issues; the FSA believe that there are a number of key reasons why RBS failed, which in turn led to the current economic crisis, two of which are shown below. 

They firstly believe that the regulations that were in place at the time regarding capital were insufficient, this created a culture of inadequacy of capital within banks, thus combined with a heavy reliance of short term funds from wholesale markets led to an exposed system, the report also states that the regulators failed to understand the consequences of such a systemic fragility and they state that it is “central to the origins of the crisis”.  The FSA here state that the regulations under estimated the need for capital, a problem which they claim to be rectified.

The second issue is that of the acquisition of ABN AMRO. This acquisition increased RBS’s exposure to risky asset categories and reduced an already  low capital ratio.  The FSA state that this acquisition was done without due diligence and the risks associated were not carefully considered.  They also admit that their level of regulation was inadequate and provided insufficient challenge to the issue, they do however state that the blame for such an event occurring must lie with RBS….

In my opinion they are almost passing the blame here and turning it away from themselves.  If your role within an economy is, to regulate important decisions that have never-ending consequences for the rest of the financial world,  do just that and not put the blame back on the company.  It is almost like leaving the front door of your house open, then blaming the police for your house getting burgled.

I am not for one second stating that RBS are in no way accountable for what happened, of course they are, but the attitude of the FSA in this article is apparent of a culture that has been created, one of “passing the buck”.  I feel that this brief insight into the FSA’s dealings with RBS has painted a picture of an authority that were poorly run, and through their own admission, provided an inadequate service.   Next week I am going to look at the theory behind financial regulation and whether or not is it is necessary in modern day financial industries.

Thanks for Reading

Take Care

PN


PS Below is a link to FSA's chairman Adair Turner's recent interview on BBC.
http://www.bbc.co.uk/news/business-16135506