TSC's four lessons learned on RBS failure

There are many lessons to be learned from the near-collapse of RBS. Special advisers to the Treasury Select Committee Bill Knight and Sir David Walker set out what they believe were the four main mistakes which led to the bank's downfall - and how they recommend we avoid them in future.

In their review of the evidence compiled in an FSA report into the regulator's supervision of RBS, Knight and Walker said: "There are many lessons to be learned from the failure of RBS. We wish to emphasise one critical generic point - the overriding importance of prudence in banking.

"Anyone who doubts the need for prudence in circumstances of such
vulnerability should read the story of the failure of one of the largest banks in the world - the Royal Bank of Scotland."

Here are their four key lessons they now think the financial industry should have learned:

1. CEO's responsibility for delegation

The FSA - and in future the PRA -  screening process of significant influence function (SIFs) individuals before appointment should be complemented by placing an explicit obligation on the CEO to satisfy, on the basis of appropriate and regular performance assessments, that those to whom key responsibilities have been delegated continue to be fully able to discharge them appropriately.

Knowledge that discharge of the CEO's responsibility in this respect is being given much greater weight in the ongoing supervisory process should yield correspondingly greater attentiveness to this critical aspect of their role on the part of CEOs.

2. Regulation of banking acquisitions

We think it unsatisfactory that existing statutory provision does not
require a UK bank of which the FSA is the lead regulator to obtain the
specific agreement of the FSA for a proposed acquisition.

The existence of a specific statutory power would not only give the lead supervisor a clear locus in the process, facilitating probing and questioning to an extent that may not hitherto have been practicable, but should also promote greater discipline and challenge in the board's own assessment of the proposed initiative and, specifically, to an extent much greater than that achieved in the RBS Board's consideration of the ABN AMRO transaction.

We would also recommend the supervisor should encourage a board to seek independent external advice.

3. The supervisory relationship

The widespread current tendency is to see repair of the financial system in terms of much more demanding ratios for capital, liquidity and leverage. These are critically important.

But they will not alone deliver the enhancement in the robustness of major banks and of the whole financial system that will be achievable through higher quality supervision based on a solid foundation of mutual respect and trust between supervisor and supervised.

4. Industry expertise on the board of the regulator

We recognise that composition of the PRA Board [using individuals who may have been involved in the banking crisis] would increase the risk that conflict issues arise.

[But] it would be in our view an advantage for such experience to be similarly available to the regulator as part of its governance structure. A regulatory Board with such experience would be in a good position to hold the executive to account, to assist with the identification of priorities and to
command the respect of the market.