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Daily Insurance Industry News
Wednesday 22nd of November 2017
December 12, 2011

FSA’s RBS report considers role of institutional shareholders

by Gill Montia

Story link: FSA’s RBS report considers role of institutional shareholders

In its long-overdue report into the failure of Royal Bank of Scotland (RBS), the Financial Services Authority (FSA) comments on the role of shareholders in the bank’s disastrous acquisition of ABN AMRO.

According to the regulator, RBS had the support of its institutional shareholders over its battle with Barclays for ownership of the Dutch bank, with 94.5% of the votes cast by RBS shareholders in favour of the transaction.

The report states: “Of the institutional investors the Review Team met, several of those recalled not being altogether comfortable voting in favour of the deal but, ultimately, they did, as shown by the percentage of votes cast in favour of the acquisition.”

At the same time, “many” of the hedge funds that the FSA’s team met when compiling the report were critical of the acquisition which they remembered considering a “ridiculous vanity purchase”.

Some of the hedge funds suggested RBS was looking for a “trophy” deal and that the bank’s chief executive was under pressure from both consortium partners and shareholders to complete the acquisition which became “a deal that Sir Fred Goodwin had to close to keep his job”.

The FSA concludes: “Shareholders must themselves share some of the responsibility for the problems at RBS which the acquisition of ABN AMRO created.”

Legal & General Investment Management (LGIM) was at least on the ball, having called for the resignation or Sir Fred Goodwin and the bank’s then chairman, Sir Tom McKillop, in May of 2008 when the bank announced a £12 billion rights issue.

LGIM had been led to understand that RBS had no need to raise capital at that time.

In summary the FSA report concludes that the failure of the bank can be explained by a combination of six factors:

1. Significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework.

2. Over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity.

3. Concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA.

4. Substantial losses in credit trading activities, which eroded market confidence – both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be.

5. The ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence.

6. An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.

 

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