They said they were sorry, deeply sorry. One by one, each of the four disgraced bank chiefs apologised in front of the Treasury Select Committee.
But as the session went on, those apologies started to fade. It was all down to the “turn of events”. Things happened that nobody foresaw, that nobody could have foreseen.
This won’t do. It wasn’t a “turn of events” that brought down RBS and HBOS. Each bank made serious mistakes, and their boards failed to prevent them.
RBS made two huge mistakes. Its funding gap – the gap between its liabilities and its deposits – grew from £83 billion in 2003 to £164 billion in 2008. That gap was easily the biggest of any British bank, and twice the size of Barclays’ funding gap. It was one third of the total funding gap of all six big UK banks.
Ten years ago banks didn’t lend out more than they had in on deposit. But in the rush to get bigger and bigger – and to claim those bonuses for deals done rather than value added – they simply borrowed more and more from the wholesale money markets.
Much of RBS’s funding gap was the result of a further mistake – the acquisition of ABN Amro. RBS paid £10 billion for Amro right at the top of the market. They pressed ahead with the acquisition even after Amro had pre-sold LaSalle, the business RBS really wanted, even after every City investor and analyst said they were paying too much, even after the credit crunch had started.
Today the former chairman confirmed to me that RBS’s investment in Amro is now worthless. They’re having to write off £15-20 billion on the deal. That’s almost exactly the amount the taxpayer has now had to put into the RBS balance sheet. Thank you Sir Fred Goodwin.
HBOS’ mistake? 40% of their lending was for property and
construction. But even after the property market turned down, they
just went on lending. Often they took equity stakes in the businesses
they were banking. All of this has now had to be written down, as
property values here in the UK have fallen. Nothing to do with
sub-prime in the US.
But whatever happened to regulation Why did the banking supervisor,
the FSA, approve all this lending? Did it not understand how much
RBS was over-paying for Amro? Or how much HBOS was exposed to the
property bubble ? Or how both banks were over-dependent upon the
wholesale money markets?
Yes, the bank directors were feeble. There weren’t high calibre
non-executive directors capable of standing up to powerful chief
executives. But again, why didn’t the FSA step in and insist that the
Boards be beefed up?
The regulator failed. In fact everybody failed to blow the whistle.
The dealmakers needed acquisitions for their multi-million bonuses.
The government had every reason to keep the party going: those bonus
were a huge part of its income tax yield. The FSA was hooked on its
Remember: when Gordon Brown first set up his new system of banking
supervision, the amount British banks lent out was matched by the
amount that they held on deposit. In fact, they were often in overall
By the time he finished as chancellor, they were lending over £625
billion more than they held on deposit. That’s not supervision – it
was sheer recklessness. It’s that funding gap which is the key to
understanding how our banks have crumbled.
Never again. We need banks that do banking – simple, straightforward
banking. Taking in deposits and lending out against them. Measuring
risk properly. Tailoring bonuses to genuine performance and long-term
And we need a proper regulator. Brown’s FSA quango has failed us all –
it slept through Northern Rock, it didn’t challenge the Scottish banks,
and it didn’t warn against the Icelandic banks. 3,000 bureaucrats who
didn’t do their job. Thank you again Gordon Brown.