Royal Bank of Scotland - Essay Example

 Royal Bank of Scotland Coursework Table of Contents Table of Contents 2 Introduction 2 Issue Identification 4 The anatomy of the problem 5 Who were affected by the scandal 5 Government Actions 6 Reflection 6 References 9 Introduction The Royal Bank of Scotland is the company that emerged when the Company of Scotland that was established in 1707 failed (Russel & Cohn, 2012). The new organization was chartered in 1727 as the Royal Bank of Scotland or Banca Rioghail na h-Alba (Munro, 2011). Archibal Campbell, Lord Ilay was appointed as governor (Stewarrt, 2012). Quite recently, specifically in 2010 when they posted £1.1Billion in losses subsequent to a UK government bailout nearly £1 Billion in staff bonuses were granted. More than 100 senior bank executives were paid in excess of £ 1 Million each. This resulted to CEO Fred Goodwin being stripped of his knighthood while CEO Stephen Hester renounced his £ 1 Million bonus after several complaints over the bank’s performance have been made public. The anatomy of this particular problem will be explored by this paper. More specifically how this happened and what was the residual effect on all the stakeholders of the banks. This paper shall analyze the exorbitant bonus payout by the bank to its employees. This paper shall also tackle what the banking regulators did to resolve and prevent these practices from happening again in the future. It should be noted that this particular controversy affected not only the image of the bank in general but also its credibility and the credibility of the people managing the bank. The institution on to itself is composed of its creditors and clients aside from its regular staff and the public in general. The bonuses according to some sectors were considered in bad faith by the clients. A reflection at the end of this paper shall be provide the author’s point of view and his additional recommendation if any. Issue Identification Bonuses are given as an incentive for a job well done. However, in this case the bank has posted a loss of more than £1.1 Billion and its employees most specifically the bank’s senior officers has the temerity to collect nearly £ 1 Billion to reward itself for doing poorly (Treanor, 2010)? Had they defer the payment of the bonuses, would it mean that the bank would have posted much less in terms of losses? It should be noted that banks provide stability in the financial market, posting a large loss no matter how large or prestigious the bank is. Confidence in the banking sector is not only affected by controversies but it reverberates to the entire banking community and financial sector. The instability brought about by controversies eventually affects the economy of the United Kingdom as a whole (Monroe, 2010). At the time this controversy was percolating in the banking community there were no existing regulations that will cap bonuses much less the regular compensation of the Royal Bank of Scotland’s most senior officers. Ergo for all intents and purposes senior managers were not violating the law and their obligation to do no fault before the bars of justice. However the ethical standard was not only thrown out the window the sense of propriety of the people involved was put into questions. The board of directors itself populated by either the same people who will receive the bonuses shall of course choose to receive the bonus. It should be noted that there is nothing wrong in getting bonuses however, getting it from a distressed bank or an institution that are not only losing money but will be bailed out by the government. The anatomy of the problem Bonuses are incentives given to employees for their good performance. Bonuses should therefore only accrue if the entire organization performed well. In the case of the Royal Bank of Scotland the opposite happened the senior executives were rewarded for their bad performance (Treanor, 2010). In the case of the bonuses awarded to the senior executives of the Royal Bank of Scotland the bonuses were part of their contract. Thus, the bank was precluded into awarding it because if its contractual obligation. Who were affected by the scandal The action of the Royal Bank of Scotland affected all the stakeholders of the bank. The resulting losses in the value of its shares resulted in losses for all the investors including the United Kingdom government itself. It should be noted that the United Kingdom owns more than half of the Royal Bank of Scotland. The impact of the bonuses resulted to losses that resulted in turn to a bail-out which could have been used by the United Kingdom government to bail out institutions that are truly in distress. The Royal Bank of Scotland is a large institution with several holdings its collapse would have resulted to economic dislocation that have worldwide repercussions. Without the bonuses the losses would have been smaller, ergo, the bailout would have been smaller as well. The controversy also affected the already sagging image of the banking industry. Already suffering from the perception of being mismanaged the banking institution suffered another blow of being the milking cow of executives. These perception also affected the good bankers and the other banking institutions. Government Actions The government levied taxes on bonuses and pressured banking institution to pay bonuses but deferred cash payment of the bonuses utilizing shares of stocks instead of the much needed cash. Reflection Banks are the very foundation of the economy of the United Kingdom, if its citizens lost its trust and confidence in the banking sector the result would not only be economic dislocation but also total economic chaos. These events would precipitate from the shortage of currency which banks help to balance to ensure that their amount can be sustained by the sum total of the United Kingdom’s assets. Thus it is essential that banks are free from controversy that may cause the subject of the United Kingdom to lose its trust and confidence. The United Kingdom considered as one of the steadiest economy in the world may lose its status if the banks within the United Kingdom are questioned ethically. Being one of the top ten economies in the world may result or force the world economy into global recession. The Royal Bank of Scotland being a global citizen or an organization that is considered as global in nature need to adhere to specific provisions of international laws that comes in the form of treaties and bilateral or multilateral treaties. The United Kingdom failure to institute immediate sanctions to erring banks and their officers were not enough and cannot be rectified by a mere threat of an increase in taxes on bonuses. Drastic measures such as those implemented by the United States to break down or collapse the banks into several pieces were even lobbied by some legislators from both houses of the United Kingdom. Considering that the government of the United Kingdom owns more than half of the Royal Bank of Scotland, it is therefore in the best interest of the government to protect its interest through the board seats it occupy. The bonuses for all intents and purposes may have been given or agreed upon by the board of directors with the senior executives of the bank long before the losses were incurred. Thus, the senior management that was affected was well within their rights to receive the bonuses. However, considering that bonus are supposed to be rewards for a job well done. The bonuses are not only needed but it was never really justified in the first place. The revisions in the banking laws that comply with Basel 1, 2 and 3(Onorato & Battaglia, 2010) and the legislation of rules similar to the Volcker rule in the United States were instituted. New laws that put a cap on salaries of senior officers of banks and other related institutions were also implemented. This will ensure that senior executives do not capitalize if not take advantage of bail outs or relief from the government only to be spent in bonuses. Payment of the bonuses thru non cash means such as stocks and bonds issued by the bank was also a good strategy however, it did not preclude to dispense assets it badly need to rehabilitate itself. Relief or bail outs are government funds and therefore it is for all intents and purposes come from the taxes of the citizens of the United Kingdom. The banks should exercise more prudence in its use. The failure of the government to take action through the board seats it occupy in the board of director of the Royal Bank of Scotland to veto if not alter or defer the implementation of the bonuses should not be repeated. The government itself should be more circumspect and assertive in the use of the funds that emanate from the taxes of its citizen. It should with fealty protect the interest of its citizens. The United Kingdom may have for its failure to act by itself would have precipitated another global economic recession. This would have been the likely scenario if the clients of the Royal Bank of Scotland succumb to the pressure of public opinion and withdraw en mass that would have lead to a bank run. References Basel Committee on Banking Supervision, 2009. Strengthening the resilience of the Banking Sector. [Online] Available at: http://www.bis.org/publ/bcbs164.htm [Accessed 2 May 2011]. Monroe, M. F., 2010. Consultative Document: Strengthening the Resilience of the Banking Sector, Washington: American Banker's Association. Munro, N., 2011. History of the Royal Bank of Scotland. 1st ed. London: The Grimsay Press. Onorato, M. & Battaglia, F., 2010. Response to the Basel Committee's Request for Comments on the consultative document:, Basel,Switzerland: Bank for Intenational Settlements. Russel, J. & Cohn, R., 2012. Royal Bank of Scotland. 1st ed. London: Book on Demand Ltd. Stewarrt, D. T. C., 2012. Royal Bank of Scotland. 1st ed. London: Dicho. Treanor, J., 2010. New Outrage Over Billion - Pound Bonus Plans at Barclays and RBS. [Online] Available at: http://www.guardian.co.uk/business/2010/feb/14/bank-bonuses-barclays-rbs [Accessed 10 November 2012]. Treanor, J., 2010. RBS Bankers get 950 M Pounds in Bonuses despite 1.1 Billion Pounds loss. [Online] Available at: http://www.guardian.co.uk/business/2011/feb/24/rbs-bankers-bonuses-despite-loss [Accessed 10 November 2012]. Read More