The to encouragement its frail capital base.

The
failure of the Royal Bank of Scotland in 2008 was a result of a plethora of
actions and consequences and not that of an isolated event. The overhead historical timeline of actions leads to the
failure of one of the biggest and very influential banks in the United Kingdom.
The failure came as a massive shockwave and disclosure to the bank’s
stakeholders and shareholders, nevertheless, when the key purposes for the
disappointment are considered it was foreseeable. Overall, the purpose of this assignment
is to examine the key purposes that lead to the breakdown of RBS in 2008, what
happened within the corporation and the corporate governance setbacks.() It
is therefore essential to examine in more depth some of the economic and
political landscape that existed at that time in order to better understand the
reasons behind this.

 

Firstly, as
per the historical timeline, on April 22nd 2008, confronting compression
from the board of governance and the UK government, the Royal Bank of Scotland
(RBS) pronounced that it was distributing £12 billion rights issue according
to encouragement its frail capital base. The company’s share price was £3. Secondly, on 13th October 2008,
RBS established a multi-billion pounds government bailout, for example, the
bank met possible failure and this bailout fundamentally completed the plural
shareholder. The share price at the London Stock exchange (LSE) rushed to 65.7
pence. Therefore, on November 10th, 2008, the UK government additionally
bailed out the bank and took 58% stake valued at £15billion and an extra
£5billion of preference shares in the bank. According to Stephen Hester, RBS
CEO Fred Goodwin reconciled and was substituted. Also, on February 26th 2009, RBS stated
the biggest loss in the history of corporate Britain, that of £24
billion for the 2008 financial year. This encouraged the UK government to stop
a yearly pension for the reconciled
that Fred Godwin stated of about £700,000 (Guardian, 2011).

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Moreover, the Royal Bank of Scotland was one of the three greatest
and most famous British banks that collapsed throughout the 2008 financial
crisis and was bailed out via the Bank of England. The bank of England was originated
in 1727 and is one of the oldest banks in the UK. The bank hired Fred Goodwin
as a representative CEO and he had a standing of aggressive cost cutting in 1998. RBS developed the
second greatest bank in the UK, when it developed Natwest Bank for £20.7bn in
2000. Fred Goodwin removed more than the Chief Executive of the RBS Group in
2004. Therefore, he was principally credited with bank’s national development
and the acquisition of 20 original corporations. In 2007, RBS acquired ABN AMRO
for £71 billion notwithstanding the earlier, consuming an unfortunate capital
structure. However, this was based on the decision making on behalf of RBS’ administration
and which was not considered appropriate as the RBS management failed to carefully conduct an
examination prior to the purchase. In addition, this action matched with the
financial crisis of 2007-2008 and RBS was unprotected and stated a fall in £950million
of its sub-prime assets (Thomas, 2011). As a result, there were several purposes
that lead to the collapse of the Royal Bank of Scotland.

 

Furthermore, it showed evident flaws in its’ capital position. During
the time of the financial crisis in 2007-2008 the Royal Bank of Scotland was
holding less capital assets than the highest of its competitors in the banking segment.
This was a management strategy that expected at consuming capital is the greatest
efficient way achievable as they sought to stay competitive (FSA, 2011). Furthermore,
to this severe capital policy is the corporation’s pronouncement to obtain ABN
AMRO Bank with debt and not over equity. This reason will be further examined
below, as it is a contributor to the bank’s failure in 2008. Conversely, it is undoubtedly
related to the bank’s weak capital situation according to the financial crisis.
In the Walker Report (2009) it is stated that the role of corporate governance
is to cover and to improve the benefits of shareholders with setting the
strategic direction on behalf of the corporation in addition to supervising in
what way the management chosen is accomplished of accomplishing this strategic
goal. The disadvantage in the capital position is that it can proved to be responsible
for underprivileged management decision-making.

 

Additionally, for various banks underprivileged liquidity situation
was a key reason for their collapse throughout the financial crisis and this
was not dissimilar for RBS. According to the FSA (2011) report, an
over-reliance on short term, dangerous wholesale funding that was completed probable
across an insufficient attitude to the regulation of liquidity was an important
reason that contributed to the failure of the bank. Essentially, the comprehensive
money market lenders lost confidence in RBS and were unwilling to deliver
funding. The corporation increasingly
became more vulnerable as was getting more involved with short-term lending and
this was additionally established through the acquisition of ABN AMRO bank. According to Corporate
Governance principles, it is compulsory that the board of directors display and
control systems. Nevertheless, the RBS did not understand the corporation threats
when the short term interbank deposits were intricate therefore it was challenging
to control and moderate these dangers (Holland, 2010).

 

The quality of the assets base is another factor, which heavily
contributed to the failure of the RBS. During the period of 2008 and 2009 there
was a series of operating losses and massive loan impairments that were knowledgeable
via highest financial associations, which comprised RBS, Lehman Brothers and
Northern Rock (European Union, 2010). The management predicted these massive
losses and there was increasing improbability throughout the board on how massive
these losses would be for RBS; which was a main element on the bank’s letdown.
This giant extent of losses at the bank was generally estimated due to its
asset base which was supposed to be of deprived worth (FSA, 2011).

 

According to the RBS board of directors and more particularly
Sir Fred, there was a policy of pushing for aggressive development so as to
manage stiff antagonism, and this melodramatic development is what completed greatest
financial forecasters suppose that the bank had unprotected the situation to reduced
quality loan assets by way of likened to additional competitors (FSA, 2011). In
addition, these were mostly created from the sub-prime mortgage associated to US
loans (CDOs) that the bank invested in 2006. These loans experiences enclosed numerous
segments however commonly were great profitable lands. It was not a shock when
RBS completed a loss of £2.5billion in 2008 that was related to the company’s organised credit,
which contained the CDOs (Walker Report, 2011). According to Fraser (2014),
RBS’ internal auditors did not deliver the satisfactory checking of the dangers
involved when the bank decided to invest in the sub-prime mortgage market in
the US.

 

Damages in credit
trading were an important influence that contributed to RBS quickly falling
capital position level and was fundamental to the failure of market self-assurance.
Furthermost of the trading losses that were stated, there were connected to the
sub-prime mortgage assets in the US, which produced the credit crisis in 2008 (Daily
Mail, 2011). The US housing market experienced a boom as banks like the RBS
were providing credit to clients who were unable to repay their mortgages in
the future, consequently the collected toxic investments for instance cash. This carried
around a credit boom where multifaceted controlled goods were produced to deliver
supposedly short danger sections of AAA rated safeties from portfolios of poor quality credit
(Thomas, 2011). The fast rise in the numeral of multifaceted securities such collateralized debt
Obligations (CDOs) and additional complex mixture devices accepted approximately
a melodramatic increase in credit danger of delivering credit to sub-prime debtors.

 

According to FSA (2011), RBS was slow in responding to
the dangers of great revelation to the sub-prime products than its competitors
in the market. Moreover, RBS management had unsuccessfully failed to document
the risk situations to others when it understood the increasing credit declines.
This lead to gigantic and major trading losses in the books of RBS, which
amounted to nearly £8.5billion and lead to a further loss of assurance in the
market.

 

FSA (2011) supported
that RBSs possession of the ANM AMRO heavily affected the RBS and that was also
a contributing factor. Furthermore, the following three factors are also
included in the FSA statement (2011): The bank’s increased credit and leveraged
assets lead to further debt instead of equity. Therefore, a significant amount
of the reported losses where associated with assets from the ABN AMRO and as a
result caused further turbulence in the market. Moreover, RBS’s capital
structure ratio was rapidly diminished as the transaction was financed by
short-term debts. More particularly, funding 50% of the acquisition in such a
way was considered a risky strategy on behalf of the RBS management (Walker
Report, 2011). Consequently, potential market lenders became more and more
hesitant towards lending RBS/ABN AMRO and this in turn caused further decline
in their liquidity position. This domino effect added increasing pressure on
RBS’s resources, which the RBS was unable to maintain such acquisitions as it
requires enormous capital requirements.

 

The Daily Mail (2011) specifies
that at a minimum of 15 directors of RBS board were considered unsuccessful when
they did not practise their responsibility of inspiring the acquisition of ABN
AMRO. Due to conscientiousness for the acquisition and the board’s fear to request
Sir Fred Goodwin’s strategy there was a massive segment in the failure of the
bank. Similarly, according to Martin (2013) the RBS’s setback can be recognised
largely to the decision making of its board of directors. RBS was showing extreme
risks and weaknesses than its patricians due to of its board’s poor management
decision making. The FSA Report (2011) stated that the bank’s management experiences
and corporate governance was visible throughout the financial crisis. More
specifically, the RBS’ position regarding the balance among balance and development left plenty
to be anticipated. The chairman of the FSA Report that observed into the circumstance
of RBS setback and its corporate governance deficits believed that “errors of judgment and execution made by RBS executive
management…resulted in RBS being one of the banks which failed amid the global
crisis” according to Lord Turner. Lord Turner went
on to support that “there were pronouncements for whose commercial significances
the RBS decision making and Board were eventually responsible” (FSA, 2011).

 

This assignment has principally
focused on the purposes that caused RBS to collapse in 2008 and provided a brief
overview of some of the main triggers, which lead to this, from the origins of
RBS to the financial crisis and the failures of corporate governance in
preventing the crisis. As a conclusion, it can be argued that plenty of them
are predominantly down to poor decision-making and poor
corporate governance practices of the
RBS although arguably, prior to the financial crisis the worldwide financial
system was undergoing weakness (Martin, 2013). Furthermost, multinational banks
and additional financial organisations were progressively getting more and more
connected because of the increase of complex hybrid goods and derivative securities
such as the interbank offering provisions, the repo market and the previously examined
CDOs market. The collapse of one association in this chain would have extremely
indeterminate significances for additional worldwide banks. Following the FSA Report conclusions (2011) the
Financial Services Authority disapproved the “light touch”
instruction that was stimulated via the Labour government as it termed for total overhaul
of the instructions controlling banks for example RBS. In market economies such
the UK banking segment where RBS functions, associations usually undertake
risks on behalf of shareholders and if they do not achieve their
responsibilities as estimated then it is the responsibility of shareholders to encourage
the corporation management and board through dismissing them. Financial analysts have pointed out the failure of managers
to ascertain the overhead risk and the potential follow on consequences in case
one of the banks unsuccessful, supplementary capital supplies and liquidity subjects
all played an important role to the start of the global credit crunch and
financial crisis (Holland, 2010). Every part of these features contributed to
the weakening in market confidence.