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But this bank has a history of operational disaster in the year 2008. RBSs
failure in October 2008 has imposed large costs on UK citizens. To prevent
collapse the government injected 45.5bn of equity capital: that stake is
now worth about 20bn.1 But this loss is only a small part of the cost
resulting from the financial crisis. The larger costs arise from the recession
which resulted from that crisis, within which RBSs failure played a
significant role. That recession has caused unemployment for many, losses
of income and wealth for many more.
Acquisition of 2 Banks by RBS in 2000-2006
RBS Takeover of National Westminster Bank Plc in the Year 2000.
RBS lead a hostile takeover of the troubled ABN AMRO.
But it was complex and risky because the market was peaking and
maximum of the risk were about to turning into major losses,
In 2000 In 2006
Balance Sheet Position 304 Billion Pound 848 Billion Pound
0
In 2000 (Billion) In 2006 (Billion)
Position of RBS in 2000-2006
In 2000 In 2006
3
Profit
2
RBS decided to make a bid for ABN AMRO on the basis of due diligence which
was inadequate in scope and depth, and which hence was inappropriate in light of
the nature and scale of the acquisition and the major risks involved. This was the
inevitable result of making a contested takeover, where only limited due diligence is
possible. In proceeding on that basis, however, RBSs Board does not appear to
have been sufficiently sensitive to the wholly exceptional and unique importance of
customer and counterparty confidence in a bank. As a result, in the Review Teams
view, the Boards decision-making was defective at the time. RBS believed in its
ability to integrate businesses successfully after the acquisition of NatWest; in the
case of ABN AMRO, it underestimated the challenge of managing the risks arising
from the acquisition.
Drawback of RBS while doing Business
Weakness:
Risk appetite was greater than peers
Greater reliance on prefer share than ordinary equity
RBS was heavily relied on short term wholesale market for fund
sourcing.
Year 2006 Year 2003
Net Borrowing Comparison 72 Billion Pound 3 Billion Pound
Yr-2003 bn
Net Borrowing
Comaprison Yr-2006 bn
- 20.0040.0060.0080.00
Fund Sourcing Status of RBS
RBSs position : Just before the disaster
RBS bought risky bank (ABN AMRO) for Euro 22.6 Billion.
Funding Source was short term debt rather than capital raising .
94% shareholder voted for acquisition.
December 2007:
RBS eases investor fears when it reveals lower-than-expected write-downs of
1.5bn for both RBS and ABN Amro following the meltdown in the US sub-
prime mortgage market. It offsets 250m of the write-downs by using its own
cash reserves instead of turning to the increasingly expensive wholesale
credit markets.
November 2008:
The move comes as the government takes a 58% stake in the bank for 15bn
as part of a mammoth capital raising. RBS was nationalized in
2008.Government injected 45.5 Billion of Pound as Equity and currently
80% owner.
Why did RBS fail?