The Financial Services Authority’s “light touch” approach to RBS’s growing real estate exposure was one of the underlying factors that contributed to the downfall of the bank in 2008.
A long-awaited report into the failure of the bank three years ago criticises both the FSA’s own regulatory work and the bank’s faulty management, ahead of the government’s rescue of the bank in October 2008 following equity injections totalling £45.5bn.
FSA chairman Lord Turner said the body did not take a close enough interest in RBS’s real estate exposure. He said: “The FSA’s general approach to super-vision involved limited fundamental analysis of balance sheet composition or asset quality.
“While the supervision team did identify growing commercial property exposures as a concern in 2005, there was, with hindsight, a failure to follow through with supervisory action that might have reduced RBS’s vulnerabilities in this area.”
It specifically identified asset quality concerns and uncertainties arising from aggressive growth – including property lending – as one of six key factors leading to the failure of the bank, alongside a weak capital position and its £49bn acquisition of ABN AMRO.
The 452-page report said that RBS was a visibly aggressive competitor in a range of market segments, including commercial real estate, in which significant risks materialised.
At the end of 2008 the bank’s commercial property loan book totalled £106.6bn. This comprised £48.3bn against UK housebuilders, construction and property companies; a £19.7bn loan book from its Ulster Bank subsidiary, across corporate, commercial, residential and develop-ment; a £3bn US real estate lending loan book; and a further £35.6bn in its Global Banking and Markets (GBM) division.
The report also criticised the poor quality of the underlying assets, which “deteriorated from having some of the lowest levels of impairment among its peers for 2007 to exhibiting asset quality below the average of its peers” by the end of 2010.
Bridget.O’Connell@estatesgazette.com
