Royal Bank of Scotland

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Everyone’s to blame. The Financial Services Authority’s near 500-page report into the failure of Royal Bank of Scotland three years ago is an improvement on last year’s 300-word effort by the UK bank regulator. More self-flagellation by the FSA and detailed criticism of the failings of RBS’s management and board cannot heal British taxpayers’ £45bn wound. Banks (and their regulators) are still held in low esteem. But by criticising itself, previous Basel capital and liquidity standards, RBS, and its investors, the FSA has signalled the duty of each constituency to shape more robust regulation in the UK.

That the FSA felt unable to stop RBS’s ABN Amro deal, which put significant strain on the UK bank’s capital, still defies belief. So too does the lack of public intervention by the Bank of England, although it had been stripped of its supervisory role. All bank regulators worth their salt know that bad deals are done in good times.

Astonishingly, the FSA only now suggests that major bank takeovers should require explicit regulatory approval. Investors would lose out if a gun shy FSA put the kibosh on hostile deals. Even if it lacked the gumption to stop the RBS deal or to challenge its judgment and risk assessments, the FSA could simply have raised its minimum capital requirement instead of relying on the then Basel level. It subsequently held up UK insurer Prudential’s takeover of AIA, the Asian assets of American International Group, on capital grounds – although investors killed off that deal before it was too late.

Bank regulators require deterrents and sanctions beyond those available to investors. The FSA suggests that directors of failed banks be barred from positions of responsibility and have their pay forfeited. Heavy-touch regulation is here already. Heavy-touch legislation is no solution. The FSA already has the tools to regulate UK banks. It just needs to use them.

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