Regulators to admit they did not fully investigate RBS failings

According to a Telegraph article, the UK's Financial Services Authority is going to publish a report on what went wrong with Royal Bank of Scotland.

While the report will be fascinating for what it includes, it might be more interesting for what it excludes.  According to the Telegraph, the report is going to exclude a review of the underlying quality of the bank's assets or how it funded these assets.

Regular readers know that had there been utter transparency, RBS would have had to disclose on an on-going basis its current asset, liability and off-balance sheet exposure details.  With this information, the market could have exerted a considerable amount of discipline to have prevented the ABN Amro transaction.

The long-awaited report, due to be published on Monday, has already been branded a "missed opportunity" by one senior politician as it emerged the regulator had only looked in depth at two out of the seven reasons identified for the lender's near collapse in October 2008. 

Specifically, the FSA report, which will run to about 490 pages, has only investigated the circumstances surrounding RBS's takeover of ABN Amro and the losses made by the bank's investment banking division. 

Issues understood to have been left largely unstudied by the regulator's report are RBS's excessive reliance on risky short-term funding; uncertainties over the bank's underlying asset quality; and the company's culture and corporate governance in the run-up to its failure. 

"It is a great shame this report does not cover five of the critical problems leading to the collapse of RBS. In particular the poor quality of the capital of RBS raises questions about the auditors of the bank," said Lord Oakeshott, a Liberal Democrat peer....

Among the other findings in the report will be the recommendation that regulators in future be given greater powers to block bank takeovers. However, the FSA will have to explain why it did not use the powers it had at the time to stop the takeover of ABN Amro given that it was acknowledged that the deal took RBS's capital ratios to dangerous levels. 

The FSA is also expected to be criticised, including claims that it had a reactive approach to supervising capital positions and its approach to supervising liquidity was a low priority....

Given that bank capital is currently a meaningless number, not paying too much attention to it does not seem like a bad idea.

Sources familiar with the production of the final document told The Daily Telegraph that the 12-month process to produce the papers had not involved any new study into the bank's collapse and had largely consisted of asking the leading players in the debacle to comment on the regulator's existing work.