RBS - A Disaster Waiting To Happen

The Royal Bank of Scotland were, at one point, the largest bank in the world in terms of assets. They went from being average, to top, to hitting rock bottom in 2008. So what exactly, I hear you ask, was the issue? Well, it didn’t help that the guy in charge, Sir Fred Goodwin, had the nickname ‘Fred the Shred’, kinda shows the strategy he uses. Big contributions to their downfall were both their capital structure and their investing activities.

Royal Bank of Scotland and Bank of Scotland were two big competitors in a relatively small economy, they needed to expand outside of Scotland if they were to get any further than what they had already achieved. This resulted in them working to attempt to merge with Barclays (like that was ever going to happen..) and in 2000 they ended up agreeing a £21billion to buy Natwest. This was after the Bank of Scotland had bid to takeover Natwest, but RBS ended up getting ahead of the deal and making sure it was theirs!

After this, the shareholders voted to elect the new CEO, this is when Fred the Shred was elected. So now they weren’t only in Scotland, they had American branches, insurance groups, they bought smaller local banks and they even went into China! So after the takeover, RBS had access to all deposit accounts at Natwest and yep, they used them! In the three years after 2001, they spent a massive £30 billion (wouldn’t that be nice!), they were then told they couldn’t buy any more, not a surprise really! This is when another big problem started.. They went into mortgages..

This was a bad time to go into mortgages as there were huge problems with them in the US. RBS started putting together mortgages and selling them on to gain some interest. Not really sure this was a smart idea because what if people can’t pay? Okay, so people couldn’t pay. Problem.

RBS didn’t seem to want to face their issues and kept lying about their debt, thinking they could get away with it. Until they had to be bailed out by the tax payer in 2008. That was a short eight years to allow the bank to hit rock bottom. Nothing seemed to work out. It would be nice to think that lessons have been learned from this instance.

Mainly, stop putting yourself at so much risk. There is no problem with liking a bit of risk to try and gain a bigger return, but for a bank there’s only so much risk you can take when you’re dealing with customers deposits. They should have given themselves a safety net instead of throwing everything into these mortgages which were never really going to work out. They also shouldn’t have lied. If they hadn’t, maybe something could have been done about it sooner, instead of it having to be down to the taxpayer to bail out, which just makes things a little bit awkward.

Do you think things have improved after this disaster and that other banks have learned from RBS’ mistakes?