Finance and accounting : Royal bank of Scotland - Assignment Example

? Royal Bank of Scotland Royal Bank of Scotland Introduction The Royal Bank of Scotland plc (RBS) refers to as British banking, aswell as an insurance holding firm in which the HM Treasury of United Kingdom Government, as of 31 March 2012, manages and holds an 82% stake through UKFI or UK Financial Investments Limited. However, their voting rights are restricted to 75% so as for the bank to hold its listing on the British Stock Exchange, London (Walker & Knight, 2011). In addition to its main share listing on the British Stock Exchange, the organisation is also incorporated on the New York revenue market of its stock exchange. The bank has its headquarters in Edinburgh, Scotland. After the financial subside, in 2009, it was for a moment the world's largest organisation by both liabilities (?1.8 trillion) and assets (?1.9 trillion). The bank, controlled by The Royal Bank of Scotland Group (RBS Group), was established in 1727 by King George I’s Royal Charter of the National Westminster Banking Organisation, which can track its ancestry back to 1650, as well as the Ulster Bank in Ireland. The certified offices of the firm are situated in Edinburgh, St Andrew Square. Queen Elizabeth II, in 2005, opened the bank's latest head office in the suburbs of Gogarburn, Edinburgh. The bank gives out banknotes in Northern Ireland and Scotland, and, as of 2012, the bank was the only money printing institution in the United Kingdom still to print a ?1 note (Walker & Knight, 2011). Prior to the 2008 subside, as well as the universal financial predicament, RBS was very shortly the leading bank in the world and, for a long period, the second largest banking institution in the United Kingdom and Europe (fifth in the stock market value). It was also the fifth largest banking institution in the world through market capitalisation. Afterwards, with a bending share price, as well as a crucial loss of confidence, the institution fell harshly in its rankings. The bank had a market capitalisation of just about ?12.2 billion as of December 23rd 2011, making it only the 32nd biggest institution on the British Stock Exchange, London, and the bulk of the bank now belongs to the United Kingdom regime. In 2012, the United Kingdom government publicised plans to buy the remainder of the RBS shares, which it did not own as it considered that while the normal taxpayer possesses over 82% of the company after a bailout in 2008, they have 100% of the institution’s huge liability risks. The Royal Bank of Scotland controls a large variety of banking brands offering business and personal banking, private banking, corporate finance and insurance all through its operations situated in Asia, Europe and North America. In the United Kingdom and Ireland, the key subsidiary organizations are The Royal Bank of Scotland, Ulster Bank, National Westminster Bank, Coutts & Co and Drummonds (Walker & Knight, 2011). In the United States, the bank has 100% possession of Citizens Financial Group (CFG), the 8th biggest bank in the nation. The bank, between 2004 and 2009, was the second leading shareholder/investor in the Bank of China. The Bank of China was, in February 2008, the globe’s fifth largest banking institution by market capitalisation (Warner, 2013). The organisation, in 2012, fashioned Direct Line Group to follow-up its insurance companies, and started to vend shares in the novel businesses as from October 2012. This paper will discuss the underlying corporate governance issues that contributed to the collapse of RBS and how the RBS could avoid this failure reflecting on the best corporate governance practices. Question 1: Issues That Contributed To the Collapse of RBS The collapse of the organisation was, for the United Kingdom, maybe the period the true scale of the banking system's issues came home to settle. The extent of the bailout was unbelievable – ?45bn was drained directly into the lender, with numerous hundred billion pounds more offered in guarantees and loans. At the rear of the rescue, there was an expression of public anger. Rage that an institution, which had only the year before acquired the leading role in the leading banking industry occupation in European history with the €71bn (?61bn) purchase of Dutch lender ABN Amro, had, due to arrogance, hubris and ineffectiveness, been brought to the brink of collapse. In December (2011), the Financial Services Authority (FSA) concluded its inquiry into RBS, confirming the collapse to have been provoked "bad decisions", setting free the bank's senior management team comprising of the then chief senior manager Sir Fred Goodwin of unlawful activity in a 12-sentence announcement. What FSA did essentially not do, nevertheless, was publish its report. In May, after a long-running battle led by The Telegraph, the Financial Services Authority selected City grandees Bill Knight and Sir David Walker to evaluate the regulator's analysis into RBS's collapse, and lastly, generate a report that was published on December 12, a year later after the study was completed. The RBS Went Ahead With the Purchase of ABN Amro In Spite Of the Identified Danger to Its Capital Buffer Since the economic crisis hit, attempts have been ongoing to toughen the main capital ratios of all banks (Warner, 2013). It appears unusual now that RBS should have been allowed to commence a deal to purchase large parts of ABN Amro provided it acknowledged it would critically weaken its loss buffer amid a deterioration monetary crisis. The sub-prime banking predicament is basically settled to have started in the summer of 2007, but RBS's senior executive team hard-pressed on with the ABN acquisition during this period, and with the FSA's assistance. The report, hence, should uncover what discussions happened inside RBS, as well as between the bank's directors and managers along with FSA officials. In essence, the task of Hector Sants, the FSA's chief senior manager who, at that period, was its head of wholesale banking, should be spelled out. The manager has argued that Mr Sants, who will be Assistant Governor of the Bank of England (BoE) in the fresh regulatory system, had little role in green-lighting the transaction (Warner, 2013). This extends credulity provided that the acquisition from a British viewpoint was mainly about the joining of two main wholesale banking organisations. The RBS and the FSA Did Not Discuss the Effect the Sub-Prime Crisis Would Have On Its Investment Banking Arm It has turned into an element of the traditional explanation to argue that RBS would not have collapsed had it not purchased ABN Amro, but this overlooks two factors. Firstly, not the entire ABN Amro was a "bad bank", certainly it appears RBS could hardly have schemed to give its tender partner Santander more of the "fine" assets than it did and purchased more of the "bad". The report should explain why RBS settled to purchase such a complex company as ABN Amro's asset banking arm with extremely little due-diligence (Treanor, 2009). The Telegraph's most excellent perceptive so far is that RBS did not think about the consequences of putting two such large firms together. This is the forced depletion of billions of pounds of business deposits. Secondly, there should also be a complete explanation of how much was acknowledged concerning the state of RBS's own asset banking arm. Did the FSA ask the organisation properly on its exposure to sub-prime securities? Publications released by the Asset Protection Scheme as from the bank's rescue have proved that the bigger part of the organisation’s toxic investments came from its own asset bank, but not in the ABN deal (Treanor, 2010). The FSA Badly Undervalued the Capital Needed By RBS In Addition To Other Failing British Banks The Telegraph's personal inquiry into the proceedings, which led to the bank's collapse, discovered a substantial divergence in view between the Bank of England (BoE) and the FSA on the need to recapitalise United Kingdom’s banks. Only days before RBS came near to running out of funds, in October 2008, the Financial Services Authority was arguing that the whole capital constraint for the full sector was only ?20bn at most, to the disappointment of the managers who felt a sum of ?75bn to ?100bn was nearer to the actual obligation (Wilson, 2011). The report should clarify how much the government recognised concerning the condition of the bank's capital barriers, and if the Financial Services Authority was as far off the mark as it seems to have been (Wilson, 2011). RBS Overlooked Bad Signs Concerning the Risks of Undertaking a Wider Exposure to Wholesale Banking A majority of the FSA study has gone into the circumstances circulating the firm’s ?12bn rights issue in the beginning of 2008 (Warner, 2013). In the course of coming up with this money, shareholders were offered highly optimistic statements concerning the bank's future and the report should make clear what managers confidentially knew in relation to the state of RBS's assets. Some of RBS's senior managers are identified to have held immense misgivings regarding the bank's capacity to whether the increasing storm. Sir Fred was privately cautioned by at least one of his long-time consultants concerning the risks of purchasing ABN Amro, in essence, its exposures to multifaceted credit trite. However, Sir Fred along with the RBS board went along with the deal exclusive of undertaking full due-diligence of the company. In its report on the study last year, the Financial Services Authority blamed RBS's subside on "bad choices". The report should be more explicit (Warner, 2013). The report should make clear what counsel RBS was offered by investment bank Merrill Lynch, which gained hundreds of millions of pounds in expenses from counseling on the acquisition of ABN Amro, as well as from guaranteeing its 2008 rights issue. The Bank of England's Role in the Climax to the Bailout Three years on it now appears at least likely that RBS could be entirely nationalised. In 2008, there was a clear need to avoid this as it was anticipated the banks risks taken on by the taxpayer could be hurriedly returned to confidential ownership. The report should look at whether entirely nationalising the bank was ever thought about (Wilson, 2011). Had the Royal Bank Scotland been taken into whole state ownership, the authorities might have avoided a lot of the problems they had in the past battled with from Sir Fred Goodwin's investment bankers' additional benefits to small organisations lending targets and his pension scheme. The bank’s senior managers, until the very last minute, appeared to be peculiarly absent from the events happening. Guided by the United Kingdom's tripartite authoritarian structure, the FSA had direct liability for overseeing the banking sector, but there has been disapproval that Sir Mervyn King was uncontestable at vital periods, and had inadequate links to the banks to carry out the Governor's job appropriately. Any assessment of the collapse should take into consideration the part played by the Bank (Wilson, 2011). Did it deal with the situation at Royal Bank Scotland and other banks in the period before October 2008 with the Financial Services Authority? Did the Bank of England do sufficient to make clear to RBS its worries concerning developments in lending markets and did senior managers deal with their views on bank capitalisation with their Financial Services Authority complements? From The Telegraph's own study it seems the FSA's low projection of bank capital needs in the week prior to the bailout of RBS, HBOS and Lloyds came as a surprise. RBS Did Not Consider That There Might Be Grounds for More Lifetime Bans in the Monetary Services Industry Up to now, Johnny Cameron, head of the global banking and markets department at RBS, is the only chief worker to have been sanctioned (Wilson, 2011). The Bank, in order to avoid such factors in the future, must make clear who was accountable for what, at RBS, and whether additional actions are necessary. The Telegraph's own study discovered numerous instances of, at the least, extremely poor judgement by chief senior managers. Frequently senior executives were unsuccessful in their role to make clear their worries to Sir Fred and other directors concerning what the bank was undertaking (Wilson, 2011). This brings questions regarding the fitness of a lot of seniors to maintain high-ranking careers in the banking industry and the report should make clear whether it regards Mr. Cameron exceptionally culpable or whether there are reasons to pursue action against others. Question 2: How RBS Could Avoid This Failure Reflecting On the Best Corporate Governance Practices Recent improvements to the prudential framework will, once put into practice, significantly boost the quantity and quality of capital, which firms are required to hold. In the meantime, the Financial Services Authority has amplified its focus on core capital and initiated capital benchmarks of 8% rank 1, as well as 4% center capital after stress. If I was advising the British government instead of Lord Myners, I would stress on the importance of carrying out an assessment of the market risk capital regime (taking in reliance on VaR measures). This was suggested by The Turner Review, and is being adapted by the Basel Commission. For now, the Basel Commission has approved a package of measures, comprising of the stressed VaR, as well as improvements to the capture of credit threat in the trading book, which is being applied in the European Union. These adjustments have resulted in enhancements in capital requirements of at least 3 to 4 times for several categories of trading book investments (Simmons, 2009). A company's chief executive is the top decision-maker (Macalister, 2009). Hence, RSB should know that all other executives answer to this person. The chief executive typically delegates a lot of the strategic responsibilities to other seniors, centering instead on tactical issues, like which markets to get into, how to deal with the competition, and which organisations to form relations with. This is in contrast to the president or the chief operating officer, who supervises everyday logistics and operations. The chief executive is ultimately responsible to the board of directors for the firm’s performance. The chairman of the board, on the other hand, is the head of the company’s board of directors (Finch, 2009). The unit is selected by shareholders and is accountable for securing investors' interests, such as the firm’s stability and profitability. The board should normally meets several occasions a year to set lasting goals, evaluate financial proceedings, assess the performance of elevated managers, and vote on significant strategic moves projected by the chief executive. The chairman of the board of directors oversees the appointment, as well as the sucking of upper-level executives such as the chief executive (Macalister, 2009). The chairman normally exercises significant power in setting the board's program and deciding the result of votes. However, he or she does not essentially play an active duty in day to day management. In order to avoid regulatory capture, a regulator should hire external examiners from other federal financial regulatory agencies, as well as introduce lawyers at the start of the venture. These decisions are derived from an attempt to avoid the dread phenomenon of regulatory capture whereby regulators become too close to the banking institutions they regulate. The federal financial regulatory agency should try to create significant distance between banks and regulators. It should also attempt to ensure enforcement attorneys recognise the role of supervision and examination (Macalister, 2009). RSB should try to replicate another agency's culture and incorporate other things that might make them appear different. Some bankers have complained about examiners being too green. The regulatory capture is the main reason why some banks have had extremely good experiences, but some that have been frustrated and concerned (Finch, 2009). Sir Fred's retirement fund, which was agreed by the bank's board of directors when he left RBS last fall, has turned into a lightning rod for communal discontent over the banking industry (Munoz 2009). Last month, burglars raided his Edinburgh villa and destroyed windows in the residence, as well as the Mercedes parked outside Fred’s house. Sir Fred supervised rapid expansion, which comprised of RBS’s purchase of Dutch bank ABN Amro, but ended in the organisation’s close collapse and successful nationalisation. In 2009, shareholders accepted part of a share-issuance plan, which boosted the government's share in the bank to 90 percent. Invertors voted in the direction of the government against the bank's 2008 remuneration/reward package, which comprised Sir Fred's ?693,000 ($1 million) yearly pension (Munoz 2009). The nonbinding vote cast marked the first time such a matter has been discarded at a publicly listed the United Kingdom bank. This confirms that this matter was, in reality, a political issue, as well as a public concern. The grant a single individual ?693,000 per year as pension is unreasonable. This is because the person almost made the institution, which he worked in almost collapse. The institution went from 3rd worldwide to 38th in the split of a second. Therefore, in my opinion, Sir Fred could have been given only that ?693,000 as we reward once for taking the bank to the top, and carry on with their daily duties. The new regulatory structure, with the assistance of the FCAS and PRA, will do better than the FSA because already the issues that almost led to the collapse of the organisation have been addressed. Therefore, it will be the task of FCAS and PRA to try and ensure that these factors are not repeated in the future. Conclusion The FSA should have paid strict attention to applications for considerable influence function endorsement from weaker huge impact firms, which may find it much tougher to attract the best individuals from the inadequate pool of exceptional talent to fill their offices and manage functions. This supplementary study is now part of the new-fangled regulatory approach to the use of skill-related interviews for those applying for endorsement as a large influence function holders in great impact firms (Winnett, 2009). Provided the level of work created by one of the United Kingdom’s largest high impact organisations, additional devoted resources should have been created, in the shape of a multi-disciplinary group, in order sufficiently to respond to key events (including significant corporate transactions), for instance, the tender for ABN AMRO. It is at the moment the task of the Supervision to erect such teams to deal with crucial events of this nature (Walker & Knight, 2011). Carrying forward from this, a proper report should look at what efforts were made to redirect RBS from the course, which led to its downfall. Several senior managers and directors expressed misgivings concerning what the bank was carrying out, and their views should be reflected in a proper report if it is to be considered as a valid account. References Finch, J 2009, ‘Twenty-five people at the heart of the meltdown’, The Guardian UK, 26 January, p.16. Knight, B & Walker D 2011, The failure of the Royal Bank of Scotland: Financial Services Authority board report, Financial Services Authority, London. Macalister, T 2009 ‘Cree aboriginal group to join London climate camp protest over tar sands’, The Guardian UK, 23 August, p. 6. Munoz, S 2009, ‘Sir Fred's pension loses, 9-1’, The Wall Street Journal vol. 1, no. 3, viewed 2nd April 2013 http://online.wsj.com/article/SB123876990407486715.html Simmons, J 2009, ‘What exactly happened to RBS’, British Journal of Business Management vol. 7, no. 9, pp. 89–106. Treanor, J 2009, ‘RBS axes 3,700 jobs as taxpayer stake hits 84%"’, Guardian UK, 2 November, p. 9. Treanor, J 2010, ‘New outrage over billion-pound bonus plans at Barclays and RBS’, Guardian Newspaper, 14 February, p. 12. Warner, J 2013, ‘The policy mistake that led to the collapse of Royal Bank of Scotland’ The Daily Telegraph, 4th January, p. 1, viewed 2nd April 2013 http://blogs.telegraph.co.uk/finance/jeremywarner/100022074/the-policy-mistake-that-led-to-the-collapse-of-royal-bank-of-scotland/ Wilson, H 2011, ‘Royal Bank of Scotland collapse: the 10 questions the FSA must answer’ The Daily Telegraph, 4th December, p.1 viewed 2nd April 2013 http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8933151/Royal-Bank-of-Scotland-collapse-the-10-questions-the-FSA-must-answer.html Winnett, R 2009, ‘RBS traders hid toxic debt’, The Daily Telegraph UK, 20 March, p.8. Read More