The safety of banks wasn't on FSA agenda

 
FSA offices in Canary Wharf The FSA's Canary Wharf HQ: bank safety was not on the agenda there

There are a number of terrifying statistics in the Financial Services Authority's report into the failure of Royal Bank of Scotland.

One is that at the end of 2007, it had capital - as measured on the new Basel lll international measure - equivalent to less than 2% of its risk-adjusted assets.

This means if those assets fell just 2% in value, the bank was bust.

And, just to be be clear, this means that it probably held genuinely loss-absorbing equity capital equivalent to around 1 per cent its gross assets (as opposed to the massaged-down, Basel risk-adjusted figure).

Now a 1% fall in the value of assets is not an unusual event, as anyone who has ever made any kind of investment knows.

Guess what? It happened to RBS in the autumn of 2008, which is why we as taxpayers had to rescue the bloated bank to the tune of £45.5bn.

However, the fragility of the bank was not conspicuous at the time because the Basel rules in force at the time (Basel l morphing into Basel ll) made it look as though RBS had around five times as much capital to absorb losses as was the case in reality.

Which was just one example of the woeful regulation of RBS and of other banks.

Another example is that between January 2006 and July 2007, only one of the 61 major topics discussed at the FSA's board meetings related to "bank prudential risks".

Also, of the items reported to the FSA board within the CEO's report, just "one out of 110 related to bank prudential issues either in general or in relation to specific banks" (says the FSA).

Or to put it another way, the safety and security of banks was hardly on the agenda of the FSA at all - just when the banks themselves were engaged in the most reckless lending and investing spree in British history.

Today the FSA, on its way to being broken up - with its bank supervision and regulation responsibilities being injected into the Bank of England - is a rather more engaged and interventionist regulator than it was.

Also, RBS - thanks to the generosity of taxpayers - today really does hold five times as much capital relative to its assets as it did.

So the stable door has - to an extent - been bolted.

And if the hurricane building in the eurozone smashes it open, the damage to RBS and to taxpayers should be less than in the whirlwind of 2008.

Which is some small comfort in these anxious times.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +7

    Comment number 1.

    Robert this 45Bn rescue that was just the starter figure, the rescue is on going and it looks never ending.

    The stable door as you put it is non existant , our guarantee to not only RBS but the banks in general is open ending and will be called on again and again , nothing has been put in place to prevent it and the worldwide situation dictates it wont be long before we shell out again.

  • rate this
    +1

    Comment number 2.

    Not surprised about the outcome the FSA have always been slow at dealing with any issues raised, they always have an opinion when the damage is done - what a waste of space

  • rate this
    +14

    Comment number 3.

    "Now a 1% fall in the value of assets is not an unusual event"

    Those sorts of margins suggest that someone never expected to make ANY losses. In a way, as a result of the bailout, they were right!

    Are these circus performers for real? The FSA should've seen this, but really - did the board not get a signal when they were out on the golf course???

  • rate this
    +4

    Comment number 4.

    Another of gormless Gordon's little efforts

    ---

    Funny how it was all the scottish banks that failed so spectacularly, then to be bailed out by ... you guessed it ... scottish politicians in the English parliament having and showing no regard for English taxpayers

    And still they whinge

  • rate this
    +10

    Comment number 5.

    Banks must be regulated they are not stand alone firms they have a public service role and a strategic place in the economy. statute based governance and much more like truly independent auditing and outside representation on the board and remuneration committees tec.

 

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