RBS Royal Bank of Scotland

Takeover of Natwest in 2000

Expansionary accumulation of Risk which lead to subprime crisis and spillover
When market was peaking and maximum of the risk were about to turning into major losses,
RBS lead a hostile takeover of the troubled ABN AMRO which was complex and risky.
Consequence: RBS was collapsed and nationalized.
POSTION OF RBS
Successes :
Prior to 2007, RBS was a major player in international banking market,
In 2000 2006
Balance Sheet Position in 304 Billion Pound 848 Billion Pound

Profit 1.8 billion Pound 5.6 Billion Pound

RBS was the Leader of leveraged finance & Property finance.
Structured credit market was exposure was
Ranked 1st in global asset backed and mortgage backed securitization
Ranked 4th in global syndicated loans
Ranked 8th is International Bond market

Drawback
Risk appetite was greater than peers
Greater reliance on prefer share than ordinary equity
Tier 1 Raito
2006
RBS 7.5%
Barclays 7.7%
HSBC 9.4%

Remark: RBS was solvent

Weakness:
RBS was heavily relied on short term wholesale market for fund sourcing.
2006 2003
Net Borrowing Comparison 72 Billion Pound 3 Billion Pound

Now the Problem comes:

RBS bought another risky bank (ABN AMRO) for Euro 22.6 Billion
Funding Source was short term debt rather than capital raising
94% shareholder voted for acquisition but Barclays walked away.
RBS loses were in many areas of their portfolio. Not only for US subprime crisis
Losses of RBS and areas of losses
Area of losses Year-2007-2008 Year-2008-2010
Credit Trading 14 Billion Pound
Commercial Property 10 Billion Pound

RBS Collapsed.

Remedies:
RBS was nationalized in October 2008.
Government injected 45.5 Billion of Pound as Equity and currently 80% owner.
The failure of RBS can be explained by a combination of six key factors:
1. Significant weaknesses in RBSs capital position during the Review Period, as a result
of management decisions and permitted by an inadequate regulatory capital framework;
2. Over-reliance on risky short-term wholesale funding;
3. Concerns and uncertainties about RBSs underlying asset quality, which in turn was
subject to little fundamental analysis by the FSA;
4. Substantial losses in credit trading activities, which eroded market confidence. Both
RBSs strategy and the FSAs supervisory approach underestimated how bad losses
associated with structured credit might be;
5. The ABN AMRO acquisition, on which RBS proceeded without appropriate heed to
the risks involved and with inadequate due diligence; and
6. An overall systemic crisis in which the banks in worse relative positions were
extremely vulnerable to failure. RBS was one such bank.