Analyzing RBS's Sustainability Failure: A Detailed Case Study

This case study examines the sustainability failure of the Royal Bank of Scotland (RBS), tracing its roots back to its establishment in 1727 and subsequent expansion. The analysis identifies key factors contributing to the bank's collapse, including its capital and liquidity positions, uncertainties in asset quality, losses in credit trading activities, and the acquisition of ABN AMRO. The study highlights the inadequate capital levels, reliance on short-term wholesale funding, deterioration in market confidence, and poor management decisions as critical vulnerabilities. Ultimately, the case study provides valuable lessons regarding risk assessment, decision-making processes, and the importance of maintaining a strong equity base, emphasizing the need for institutions to prioritize liquidity and seek independent advice on significant transactions. Desklib provides access to similar case studies and solved assignments for students.

SUSTAINABILITY FAILURE: RBS
STUDENT NAME
University Name

ABOUT RBS
• Set up in 1727 in Edinburg
• First branch was set in 1783
• Expanded in England in 1874
• Today, it has its presence in UK & Ireland,
Europe, Asia Pacific, and United States
• In 2007-08, divestment of RBS was
proposed
• 308 branches in England and 6 Natwest
branches were divested by RBS (RBS 2018)

WHY DID RBS FAIL?
• Capital Position of RBS
• Liquidity position
• Uncertainties in asset quality
• Losses in credit trading activity
• ABN ABRO’s acquisition
• Overall systemic crisis

CAPITAL POSITION OF RBS
• RBS issued £12 billion rights in 2008
• RBS’s capital position in 2007 – 8%
 This is was the minimum requirement and RBS met that.
• Lost of trust among investors and funders
 Acquired ABN ABRO. Acquisition through Debt and not equity
 Change in regulations – Hold 9.5% equity to operate without
restrictions on dividends and other distributions

CAPITAL POSITION OF RBS CONTD…
• Regulatory system allowed banks like RBS to run
with inherent uncertainties
• Trading book risks were inadequately evaluated
(FSA 2011)

RBS’S LIQUIDITY POSITION
• Banks and financial institutions were
not willing to meet the financial needs
of RBS
• Short-term wholesale funding gap
increased. It was visible clearly from
July 2018
(FSA 2011)

ASSET QUALITY: CONCERNS &
UNCERTAINTIES
• Loss of market confidence as credit quality reduced
• Credit trading losses amounted to £12.2 billion in
2008
• Large loan loss provisions in Autumn 2008
(FSA 2011)

LOSS IN CREDIT TRADING ACTIVITIES
• Due to structured credit risks, exposure to monoline
bond insurers and leveraged finance
• Also due to boom and bust of US housing credit
market and Sub-prime credit
• Expansion of structured credit business aggressively
in 2006.
• Assessment of losses increased over a period of time

ABN ABRO’S ACQUISITION
• €27.2 billion to acquire ABN ABRO’s
certain businesses
 Exposure to risk trading assets
 Acquisition through debt and not equity
 No anticipation in place to understand if ABN ABRO
doesn’t meet regulatory capital requirements
 Consortium leader for ABN ABRO’s acquisition

SYSTEMATIC VULNERABILITIES AND
CONFIDENCE COLLAPSE
• Inadequate levels of capital
• Short-term wholesale funding
• Deterioration in market confidence
• Poor management decisions
• Funding needs of the bank wasn’t met

POOR MANAGEMENT APPROACH
• Low priority to liquidity
• Imperfect analysis and judgement
• CEO’s management style was poor
• No questions on the strategy proposal
(FSA 2011)

LESSONS LEARNT FROM RBS FAILURE
• Seek independent advice on the viability of
significant transactions
• Strong network should be build with the
chairman
• Detailed and structured briefing material should
be produced for decision making
• Risk assessment should be undertaken
periodically