Royal Bank of Scotland gambled with its purchase of Dutch bank ABN Amro and was dragged to the brink of collapse three years ago by poor management decisions and flawed regulation and supervision, a report said on Monday.
The long awaited report by the Financial Services Authority, running to 452 pages, criticised former Prime Minister Gordon Brown for encouraging light touch regulation, as well as RBS's weak capital and funding and its decision to buy parts of ABN Amro.
The decision to make a bid of this scale on the basis of limited due diligence entailed a degree of risk-taking that can reasonably be criticised as a gamble, the report said.
Major bank takeovers in future should require formal consent from the regulator, and the FSA also recommended a firm should obtain independent advice on a deal, from an adviser whose pay is not linked to a successful transaction.
There could also be new rules to ensure executives and directors face personal financial consequences if a bank fails, the regulator said.
The FSA -- which is due to be broken up next year and two new UK regulatory bodies formed -- was critical of its own role, but said it was under political pressure to operate a hands-off regulatory regime.
There was a sustained political emphasis on the need for the FSA to be 'light touch' in its approach and mindful of London's competitive position, the report said. On several occasions in 2005 and 2006 Brown said he didn't want unnecessarily restrictive and intrusive regulation to impair London's competitiveness.
The FSA said flaws in its own supervision provided insufficient challenge to RBS.
MULTIPLE POOR DECISIONS
Under former Chief Executive Fred Goodwin RBS came within hours of running out of cash in October 2008 and was only saved by a 45-billion pound taxpayer bailout.
Goodwin has been slammed for his authoritarian management style that discouraged dissent among senior staff -- his daily morning meetings became known as the Morning Beating -- but former board directors told the FSA they did not feel bullied by Goodwin, the report said.
Goodwin could come across as somewhat cold, analytical and unsympathetic ... (but) the picture that emerged was clearly more complex than the one-dimensional 'dominant CEO' sometimes suggested in the media, the report said.
RBS, a once small Scottish retail bank, enjoyed a meteoric rise to become one of the world's biggest banks thanks to a string of takeovers and an aggressive expansion into wholesale banking.
But it was brought to its knees by a decade-long acquisition spree led by Goodwin and his strategy to run with too low a capital cushion.
The multiple poor decisions that RBS made suggest ... that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions, the report said.
It blamed the failure of RBS on six factors: weak capital; over-reliance on risky short-term wholesale funding; doubts about its underlying asset quality; substantial losses in credit trading activities; its gamble on ABN Amro; and the overall systemic crisis, leaving relatively weak banks vulnerable.
Under the new global Basel III definition of capital, RBS would have had a common equity Tier 1 ratio of 2 percent, compared to a requirement for large and complex banks to hold 9.5 percent under new rules coming in.
The FSA said it had already become more intrusive and global changes have already addressed many of the problems. It has 23 people now supervising RBS, compared to six in August 2007.
The bailout left the UK government owning 83 percent of RBS. The taxpayer is sitting on a 25 billion pound paper loss on that investment, and appears unlikely to be able to start selling shares any time soon.
Taxpayers should never have had to rescue RBS, said RBS Chairman Philip Hampton. As we build the new RBS, we are learning the lessons of the past and working to regain the trust of the public. Our new leadership has made significant progress in making the bank safer and more focused on the needs of its customers.
(Reporting by Steve Slater and Sudip Kar-Gupta; Editing by Hans-Juergen Peters and Mark Potter)