1057297 Business Integration Project August 2016.docx 2

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RBS Retail Banking; challenges and constraints during and post-recession 2008.

BPP Coursework Cover Sheet

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before the cover/title page of your submission.

Programme BSc Professional accounting

Module name Business Integration Project

QAA Level

Schedule Term August 2016

Student Reference Number (SRN) 1057297

Report/Assignment Title

RBS Retail Banking challenges and constraints during and post

2008 recession.

Date of Submission

(Please attach the confirmation of

any extension received) 123:59 16th August 2016

Declaration of Original Work:

I hereby declare that I have read and understood BPP’s regulations on plagiarism and that this is my original work, researched, undertaken, completed and submitted in accordance with the requirements of BPP Business School.

The word count, excluding contents table, bibliography and appendices, is _5000__ words.

Student Reference Number: 1057297 Date: 16/08/2016

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awards for programmes. Please note, submission is your declaration you are fit to sit.

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BPP Business School

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ABSTRACT

The purpose of this research is to identify and understand RBS Retail Banking challenges and constraints during and

post 2008 financial crisis. US investment bank Lehman file for bankruptcy in 15th September 2008 leading to the

collapses of market shares around the world (The Economic Times, 2009).

February 2009 history is made as RBS reports a loss of £24.1bn for 2008, the biggest in British corporate history.

April 2009 the Financial Services Authority launches a formal investigation into what exactly led to 2008's RBS

collapse.

The research will draw upon most secondary sources of data including articles, reports, archives and published

information. The report therefore is to analyse RBS retail banking internal and external environment with diagnostic

assessment considering the research Aim and Objectives and whether RBS deliberately failed to take opportunities

required for a successful Retail Banking business.

RBS strategic blueprint (Source RBS Report, 2015)

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Contents: ABSTRACT ........................................................................................................................................................ 2

1.0 INTRODUCTION .......................................................................................................................................... 5

1.1 Retail Banking Industry (UK) Background.................................................................................................... 5

1.2 RBS Retail Industry analysis ........................................................................................................................ 5

2.0 RBS CHALLENGES AND CONSTRAINTS ................................................................................................... 6

2.1 Regulators .................................................................................................................................................. 6

2.2 Competition ................................................................................................................................................ 6

3.0 AIMS AND OBJECTIVES.............................................................................................................................. 7

3.1 Objectives:.................................................................................................................................................. 7

4.0 CLARIFICATION OF THEORITICAL CONTEXT ......................................................................................... 7

4.1.1 Economy.................................................................................................................................................. 7

4.1.2 Political ................................................................................................................................................... 7

4.1.3 Social ...................................................................................................................................................... 8

4.1.4 Technology .............................................................................................................................................. 9

4.1.5 Legal ....................................................................................................................................................... 9

4.1.6 Environment .......................................................................................................................................... 10

4.1.7 Competition ........................................................................................................................................... 10

4.1.8 Stakeholder theory .................................................................................................................................. 10

4.10 Application of Stakeholder theory............................................................................................................. 11

4.2.1 Customers .............................................................................................................................................. 11

4.2.2 Media and Government ........................................................................................................................... 11

4.2.3 Public bodies and Advocate groups.......................................................................................................... 11

4.2.4 Trade unions and Employees ................................................................................................................... 12

4.2.5 Shareholder and Investors ....................................................................................................................... 12

4.2.6 Regulators.............................................................................................................................................. 12

5.0 SUMMARY OF CURRENT ISSUES ............................................................................................................ 12

5.1 SWOT Analysis RBS and banking crisis ..................................................................................................... 12

5.2 Strength .................................................................................................................................................... 12

5.3 Opportunities ............................................................................................................................................ 13

5.4 Weakness.................................................................................................................................................. 13

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5.5 Threats ..................................................................................................................................................... 13

5.6 Conclusion................................................................................................................................................ 13

6.0 EVALUATION AND ANALYSIS ................................................................................................................ 14

6.1 Reputation due to traditional Banking ......................................................................................................... 14

6.2 Stakeholders ............................................................................................................................................. 14

6.2 Management and Investors......................................................................................................................... 15

6.3 Regulators ................................................................................................................................................ 15

6.4 Risk.......................................................................................................................................................... 16

6.5 Innovation ................................................................................................................................................ 16

6.6 Mergers and Acquisitions .......................................................................................................................... 17

7.0 CONCLUSIONS AND RECOMMENDATIONS ........................................................................................... 17

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1.0 INTRODUCTION

1.1 Retail Banking Industry (UK) Background

300 years old British Retail Banking concept was derived from “The period of illumination” (www.telegraph.co.uk,

2008). RBS enviable financial growth was characterised by the 2008 financial crisis and rescued by some £45Bn by

UK Government Tax Payers money (The watchman, 2015).

Figure: 1. Global financial effect Figure: 2. RBS share prices 2008

1.2 RBS Retail Industry analysis

Retail Banking is fundamental to UK economy, RBS was part of The Big Four providing wide range of retail banking

services with 14.4% and 18% group market and current account shares respectively. RBS geographical aggressive

expansion implied its needs to deal with wider issues than if simply operating in the UK market (Jeannet; Hennessey,

1998)

Risk Management

Aggressive deals culture at the heart of RBS Banking disregarded its core business sector and overall market risk and

were not address enough by regulators and investors, (Richard Lambert, 2011) non-financial performance indicators

were not considered as a feature of RBS pointer measures (Lianna Brinded, 2015).

Board Competence

Excessive pay and bonus culture was the norm at RBS, it came under constant fire from both public and media outlets.

Higher risk takers with unconventional behaviour, RBS leadership style was question when performance was bad

(FSA Report, 2012).

Regulations, Mergers, Acquisition

Deregulation was fuelled in the 80’s, ABN AMRO the Dutch Bank in 2007 was acquired by RBS been reportedly

overpaid and a significant of RBS failure, (Telegraph, 2015) (FSA, 2011) expansion into USA, China, India European

Markets was also sighted. (Sky News, 2011) reported eight years of acquisition and mergers under Sir Fred Godwin

resulted in its financial weakness and shortcoming.

http://www.telegraph.co.uk/

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Innovation

RBS IT legacy challenges much of confronted with by mergers and acquisitions compounded its problems. The Bank

failed to modernised the substances of it High Street Branches to new business opportunities (Bloomberg business

News, 2014), it loss 26,000 clients including NatWest it Sister Bank (Dad Cash News, 2012).

2.0 RBS CHALLENGES AND CONSTRAINTS

Retail Banking Economic Climate

Several UK Banking review has been dispatched including (Sir Donald Cruickshank, 2000; The Vickers Report, 2011;

CMA Report, 2014). (PCBS Report, 2013; OFT Survey, 2002) with wide ranging concerns about Retail Banking

atmosphere. In any case RBS is 2/3 nationalised since 2008 financial crisis necessitating new Banking model

necessary for recuperation from the financial crisis “the Mother of all economic inventions” (www.politics.co.uk)

Figure: 3. Banks market shares Figure:4 Bailout amounts

2.1 Regulators

UK Banks are exceedingly controlled (Mullineux, 2009) (FSABR, 2011) including EU, Universal Bodies with BoE as

Centre controller in charge of prudential and sound banking. The FCA and PRA has supplanted The FSA amid the

Banking crisis to investigate Banks misconducts in the UK, example the infamous LIBOR rigging it was fined

£87.5M by FSA for fixing rates involving twenty-one staffs and one Mangers for inappropriate conduct at RBS

(news.sky.com). Tracey McDermott, Watchdog head of enforcements said and made it clear that;

“the misconduct was one which the controllers were not prepared to endure”.

2.2 Competition

Competition has heavily affected the sector, it is thought the incumbents are not offering better options to clients and

medium size players ought to have the capacity to fill the crevice (ICM Report, 2010), creating incentives for

customers from big players by offering them better possible deals. (Graham Cosmos, 2013) concentrated on traditional

conventional controls were ugly and much more unattractive within the Banking sector. (Derek Garriock, 2014) said

http://www.politics.co.uk/

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Banking services and products is concentrated among High Roads Banks and clients’ loyalty is around eleven years

low as study reported from 75% customers (Market diagram, 2014).

3.0 AIMS AND OBJECTIVES

The aim and objectives of this is to analyse RBS UK Retail banking operations during and post 2008 recession.

3.1 Objectives:

1. Identify challenges RBS Retail operations endure during and post 2008 financial crisis.

2. Understand the 2008 financial crisis impact on RBS Retail operations.

4.0 CLARIFICATION OF THEORITICAL CONTEXT

Macro Factors

Since 2008 RBS has remain loss making with an average loss of around £2bn for the period 2009-2011 and return to

profitability is not expected in the near future due to slower recovery and stringent new regulatory measures (RBS

annual report, 2011)

4.1.1 Economy

RBS operations were intensely hit between 2008-2011 Global credit crunch with unfavourable impact on GDP, credit

services, low revenues and customer confidence (RBS Annual Report, 2014). RBS Issued B Shares (do not include

voting right, but can be converted into ordinary shares) in 2009 raised £25.5bn, but it can at the same time benefit if

customers’ confidence pick-up and interest for credits builds-up (RBS Annual Report, 2015).

4.1.2 Political

UK stable Banking environment is heavily regulated (Barth; Vaprio; Levine, 2006), on October 13 2008 UK

Government intervened and offered £20bn to RBS with 81% stake in tax payers money

(https://www.theguardian.com). Before the financial crisis RBS structure and culture model was to maximise

Shareholders wealth and interest (Private Ownership). The Bank has to push back on potential dividends pay-outs

under the asset protection scheme and other investments activities, and being forced to reduced its geographic market

share (selling off Branches in Scotland and Wales) (EC, RBS state aid, 14/12/2009) to provide financial stability

within and the wider economy.

Operating in 54 countries RBS generates 90% revenue compared is scaled back to 13 countries this markets to 50%

pre-crisis revenue (http://www.bbc.co.uk). UK Government has therefore significant powers to impose controls on

RBS after the financial crisis inevitably increasing the scrutiny of regulatory requirements. It has brought into law

reforms including ring fencing, imposing criminal sanctions for misconducts, since recapitalisation from 59.7% to

70.3% in April 2009 (https://www.gov.uk).

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Figure: 5 RBS Ownership during and pre-crisis Figure: 6 RBS Ownership statistics

4.1.3 Social

RBS was heavily criticised for its unethical behaviour pre-crisis (Telegraph, The Week, Guardian, 2009) undermining

seriously the reputation of RBS and characterised by Turner (Scotland former Minster) as UK Enron. Former CEO’s

were alleged of lavish life styles, (Jack Bremier, 2009) and due to their ineptitude such resulted to job cutting,

reductions or loss in salaries and pensions compounded with a series of events in the UK economy e.g. double-dip

recession.

Figure:7 RBS continued and discontinued operations

This affected market confidence increases unemployment and reduced consumption, moreover RBS operations

affected the public when depositors’ confidence fell collectively seeking to withdraw their money “bank-run” causing

the Bank serious liquidity problems for its long-term survival. RBS has tried to raised their social responsibility pre-

crisis enhancing transparency and corporate governance sustainability committee (RBS Annual Report, 2011).

“It’s nothing unexpected to see Banks let down its clients at the end of the day by upping sticks and leaving town even

where it guarantees not to do so”, said Charlotte Webster of campaign group Move your Money.

0%

20%

40%

60%

80%

Dec. 08 Dec. 09 Dec. 10 Dec. 12 Dec. 14 Dec. 15

Government Retail

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2006 2007 2008 2009 2010 2011Nu

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2006 2007 2008 2009 2010 2011

Discontinuedoperations

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Continuedoperations

142600145500159700199500203500141800

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4.1.4 Technology

RBS was fined £56m in 2012 for IT system failures when some 600,000 customers payments and direct debits went

missing (FT.com,2015), and since spent £1bn on IT systems upgrade facilitating customer data access for depositors

when required (FSAR, 2014) being the largest digital cheque clearer in sterling payments globally.

RBS plan to address IT legacy issues improving automation of core processes and innovations creating faster, easier,

secure and resilient lower cost but better value at the fore front of innovations (Elvin, 2009). The Bank intend to spend

£3.5bn by 2020 on processors, memory grid, storage upgrades, increase penetration on online/mobile applications

(technology transformation, 2015) to improve customer trust, value and experience.

Digital New Entrants offers wide range of banking products but with branch network reducing their operating costs.

They will rely on the internet and mobile channels to sign-up customers. New Entrants could lower costs as they

won’t have to operate legacy IT systems, which can account for 70%-80% of banks IT spending (2013). Aldermore

Bank in 2009 and several other institutions with ancillary financial/ retail services e.g. Tesco Bank 2014, the Post

Office, Virgin Money 2014, M&S Bank 2012 are among others.

4.1.5 Legal

“the measure of suit they are confronting is enormous” says Robin Henry, lawyer at Collyer Bristow

RBS was faced with considerable legal limbo from shareholders relating to 2008 right issues at which RBS sold it

shares at £2.00 per share, investor claimed defective, misstatement and material omission in the prospectus

(www.legalbusiness.co.uk). In addition, the bank is dealing with 28 separate different legal issues, CMA and FSA are

also investigating following a report from entrepreneur Lawrence Tomison (http://www.telegraph.co.uk).

Figure: 8 RBS Litigation graph Figure: 9 RBS litigation charges

It is thus impossible to estimate the impact of these legal issues on RBS and an increasing headache, the bank has

spent £858m on litigation cost, £334m litigation charges on rate rigging after a reported loss of £466m. Another

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£257m was also set a-side for mis-selling of package bank account, while another £100m went towards mis-selling of

Payment Protection Insurance.

4.1.6 Environment

Protest has occurred at a few RBS and its branches for extracting commodities in politically sensitive regions bringing

out crusades against them (peopleandplanet.org, 2012). The bank was accused for grimy money and gave €8bn

between 2008-2010 to companies listed as ecologically hostile (ethicalconsumer.org, 2012). Since 2010 RBS has

reduced its lending to the energy sector by 75%, in 2015 it accounted for around 1.4% down from 2.9% in 2014

(http://www.rbs.com)

Figure: 10 RBS lending to energy sector

The group was accused as one of the financing source of oil and gas extraction it gave billions of pounds over the last

two years to E. ON and other companies emphasizing coal.

4.1.7 Competition

UK ranks poorly for diversity and ownership of banks which is essential to maximise shareholders’ wealth and brings

benefits to consumers, society and wider community. RBS want to take on the bigger banks, it total income fell from

£27.6bn in 2009 to £19.8bn in 2013 and has to abandoned the disastrous pre-crisis expansions and acquisitions

strategy (RBS independent lending review, 2013).

The complexity of products, pricing, and transparency surrounding RBS products was another recognising factor from

independent reviews and has designed and introduce a number of significant changes within it competitive

environment. Ross McEwan said, “RBS is eliminating hundreds of products terms and conditions from small prints to

one side A4 sheet for customers” rebuilding customer trust.

4.1.8 Stakeholder theory

Stakeholder theory suggests that business purpose is to create as much value as possible for stakeholders

(www.referenceforbusiness.com). In order to succeed and be sustainable over time, executives must keep the interest

of all constituents aligned and going in the same direction (lexicon.ft.com).

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4.10 Application of Stakeholder theory

RBS engage with wide variety of stakeholders adjusting their changing needs is a test in this current financial

atmosphere and it is not straightforward the same old thing. (Beinhocker, 2006, p. 409) questions over whose

interests’ corporations should serve lie at the heart of heated debates over corporate governance reforms, corporate

social responsibility initiatives, anti-globalisation protest, and the future of EU economic model.

4.2.1 Customers

Datamonitor Financial Service Consumer Insight Survey 2009 demonstrates the 60% of UK consumers have

dependably banked with the same bank, which might only reinforced brand loyalty (Euroweeks, 2009). RBS said the

changes mirror the nature of banking system and panicking customers worsen the situation during the financial stress

period (www.independent.co.uk). After the financial crisis RBS needs to earn they customers trust through

transparency, demonstrating commitment to bring the Good old back and return the Group to good health.

The Bank reputation and the banking industry was damage during the financial crisis worsening by economic

environment with low interest rates. The FSA has been conducting reviews on how RBS worked with financial

distress customers who has been hounded, abused and persecuted by the Bank through the court system

(uk.businessinsider.com).

4.2.2 Media and Government

RBS endured negative report and media coverage during the financial crisis, it CEO Fred Godwin was criticised for

his pension package and eventually strip off his knighthood due to media pressure. The overall impression about RBS

staff was damaging, staffs were afraid of been targeted by members of the general public if they knew the work for the

Bank. This drove some to consider leaving or changing career/vocation all together as a result of belittling the banking

profession.

The political arena means RBS banking environment is generally profoundly complex with 81% Government

possession in 2014 (BBC News, 2014). The Bank new stakeholders can influence and or/ sway authorised law that

will influence RBS speculative operations, profits strategies, dividends and bonus schemes (wordpress.com)

4.2.3 Public bodies and Advocate groups

CMA considered whether the biggest Banks ought to be separated yet it went with the perspective that this would not

address the essential competition problems or give customers better deal and significantly improve retail banking.

Bank charges are complicated opaque and many customers think it is difficult and risky to change banks, advocacy

groups and regulators have received complaints of such high charges (FSA Report, 2012).

FSA pre and post-crisis report reforms into RBS is requesting positive features and because of the bank wide public

interest investigations should be made public into the failures of the bank and the failures and oversight of The FSA

itself as a body (House of Commons TCR, 2012-13).

RBS/NatWest were recently accused of social purging when the bank provided loan to Estate Developer running into

millions of pounds to buy properties on Butterfields Estate in Walthamstow London E17, just for the tenants for the

tenants to received eviction notice after some astronomical rent increase (Charityopinion.com). RBS/ NatWest were

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accused of bad banking, but they refused to say it did a bad business, the matter was referred to Parliament by MP

Stella Creasy representing the Borough.

4.2.4 Trade unions and Employees

RBS laid off some of its workforce during the financial crisis this sent negative signal to remaining staff which creates

difficulties in motivation especially during the post and pre-crisis period this means reduction in spending and

contraction in GDP. Unite National Officer for RBS Rob McGregor said;

“Unite is profoundly worried that the declaration today by RBS of further restructuring will unreasonably affect low

paid and organization staff inside the bank ”.

Implementing vision and leading change by having ability to influence staffs to achieved set of goals, on the other

hand coping with changes and running smooth operations during the financial crisis was very challenging

(www.guardian.co.uk).

4.2.5 Shareholder and Investors

HM Treasury currently has roughly some 84.45% stake in RBS and with such in question it will dependably get

government support amid anxiety. The bank benefited from tax avoidance of some £500m due to government high

stake in the bank and it continued loss making. (FSA Report, 2011)

As confidence pickup RBS will think about investment once more (www.rbs.co.uk/corporate) with offices throughout

UK and teams working across retail sector, it should be able to respond to the change financial environment but also

more fundamentally imperative to return to the private sector. (Rothschild Report, 2012).

4.2.6 Regulators

Up until to 2013 banking regulator in the UK involved three organisations, The Financial Services Authority

(FSA)The Bank of England (BoE) and the Treasury The tri-partite system. Until the banking crisis, UK banking

regulation could be portrayed as light-touch- in other word controllers don’t participate in forceful direction preferring

to intervene only when necessary and only in limited ways (www.economicsonline.co.uk).

RBS retail banking efficiency may not come easily considering the uneven effect of the financial crisis, the problem of

toxic debts resulting to loans made to the sub-prime housing market became severe because the bank failed to

accurately calculate its exposures to those debts (www.guardan.com). Heavy regulations mean the bank will be risk

averse with no aggressive expansion strategy and mergers as before, but can be some future opportunities (RBS

Annual Report, 2014).

5.0 SUMMARY OF CURRENT ISSUES

5.1 SWOT Analysis RBS and banking crisis

5.2 Strength

RBS existing business relationship can be valuable to expand its capacity, enter new market and regions to capitalised

on its economies of scale (Kemal, 2011). With driven traditional banking approach as a leading global financial group

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in more than 50 countries confers it competitive advantage. It has the expertise of restructuring deals with clients such

as Oilexco (active driller in the North Sea), Four season Hotel, LyondellBasell (madean2.wordpress.com)

With customer driven banking approach and customer capacity it can rely on customer friendly products to increase

customer loyalty and a new programme overdraft charges was introduced although it will reduce revenue, but increase

loyalty (computerweekly.com). RBS accounted for 16% of comparable market share of merger activities across

Europe this is a guarantee it can buy discount businesses (Altunbas; & Ibanez,2004). The bank loan approximately

$9bn to mergers and buyouts across Europe, Middle East, and Africa regions in 2008.

5.3 Opportunities

RBS is confronted with numerous opportunities including innovations, customers, business integrations (Ashby,

2010). Moreover, it low cost of capital from the government and tax exemptions benefits can return confidence to

RBS retail banking sector. The bank is a leader within retail industry including franchises with strong brands like

NatWest forming a major part of UK retail banking (RBS Group, 2010).

With social and rural background combine with global expansion capability and merger acquisition teams it can

expand into regions pre-crisis, the bank loans and guarantees was more than double the $4.2bn lent by French bank

Calyon (Thomas Reuters, 2012).

5.4 Weakness

(FSA Report, 2012) one of the fundamental essential shortcoming of RBS is its inability to ascertain risk, it failed to

predict the challenges in retail sector, it also failed to foresee it over reliance on expansion ignoring traditional banking

over global markets.

Increase government regulations, protection schemes and restrictions on dividend payments (Sutton; Lannoo; and

Napoli, 2010) toxic asset liquidations will all affect future earnings and market participation in the future (RBS Group,

2010). Another weakness is RBS share price and its liquidity problems, investors’ confidence and market status.

5.5 Threats

The increase government expansion, scrutiny and controls into RBS operations will increase operating cost from extra

regulatory personnel and therefore lower profit, structural reforms within the banking industry proposed by ICB will

have effects on RBS retail banking competitiveness (ICB Report, 2014). The risk of flight by depositors, general

economic downturn which might inhibit potential expansion, revenue stagnation and increase failure of growth will

make the bank vulnerable to another economic crisis (RBS Report, 2015).

5.6 Conclusion

According to study several key factors can be blamed for RBS failure in 2008 (FSA Board Report, 2011). Since 2008

RBS resulted to improve it balance sheet capital positioning partly in response to tighter capital controls, it has

contracted it expansion and acquisition drive relying more on traditional retail banking as source of funding in a

prolong economic downturn with historic low interest rates.

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6.0 EVALUATION AND ANALYSIS

A transformed RBS will deliver significant economic and social benefit to the wider society although there has been

criticism questioning its overall value after the financial crisis. As cited in the Financial Times (2009), Jack Welch

described it as “imbecilic thought” while as Martin (2008), the Dean of the Business School University of Toronto,

calls for the abandonment of shareholder value.

6.1 Reputation due to traditional Banking

RBS was founded to provide retail banking facilities and personal financial products to customers, billed itself as the

bank for the citizens the bank believed in this present challenges it has to remain independent to offer full range of

retail banking services with ambitious goals by transforming relationships developing new offerings and reaching out

effectively to communities in it post crisis to create economic benefit.

RBS began to expand operations along its counterpart such as which it recognised tremendous potential in the

industry, and taking advantage of it new found strength extended its foreign interest leading to mergers and

acquisitions of other banks. And it no by no means fearful to creating and exploiting new opportunities which led to

aggressive takeovers and acquisitions at much larger scale that compounded it problems.

In other to gain back market and financial confidence RBS needs to communicate its new business structure and

process borne by the financial crisis to its constituents, the concept which is yet unambiguous to defined and makes

RBS strategy and operations difficult in practical business settings (Milton Friedman, 1912).

6.2 Stakeholders

Stakeholder theory assert that the primary responsibility of a firm is to maximised the wealth of its stakeholders

(Friedman, 1962). Using the capital that shareholders have advanced, Managers should invest in those project which

seeks to create the maximum value for those stakeholders (Donaldson, T.J; L.E. Preston, 1995). In the past 40 years’

stakeholders’ theory has enjoyed widespread support in the academic and industrial communities (Rowe, Jonathan,

1996).

Ed Freeman on Stakeholders Management.

“Each business makes, and sometime destroys values of stakeholders. The possibility that a business is about to

expand benefits to Shareholders is outdated and doesn’t work very well, as the recent global financial crisis has

taught us. The 21st century is one of “Managing for stakeholders”. The task of executives is to create as much value

and benefits as possible for stakeholders without resorting to trade-offs. Extraordinary organisations continue to

manage to get these interest constituents aligned in the same direction as the business direction” .

RBS has to engaged all stakeholders into the new business settings which is not going to be business as usual, the new

balance of power and interest grid will affect the bank agility and operational directions which can be explain the UK

government 81% stake and tax payers interest in the bank. RBS has to currently contend with constituents it has never

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contended with pre-crisis this will affects reporting structures, internal and external controls like never before as it

failed to uphold the principles of shareholders’ corporate theory pre-crisis as study shown.

Figure: 11 RBS Stakeholder power matrix

Stakeholder Power to influence

Stakeholder Interest

RBS Stakeholder power grid.

6.2 Management and Investors

RBS is 81% owned by the tax payer pre-crisis in 2014 (BBC News, 2014). A logical question to asked at this point is

that given the risk RBS expose themselves why did Managers, Investors and shareholder failed to identify the

financial risk the bank was expose to and one possible explanation could be that shareholder and management were

reluctant to question some of the directions of the bank when they were gaining substantial returns pre-crisis. This

implies that investors are not always rational (Lo, 2005).

The financial crisis has shown that shareholders and investors may also be exceedingly confidence over the abilities of

their Managers whom they hire, for instance RBS CEO Fred the Shred abilities were over-estimated who had a

successful history in acquiring and integrating new businesses. It was further studied that greed, exuberance, fear and

herding behaviour (Basu et al, 2008) led to investors’ and management to act in an irrational manner this can be

explain why 94,5% of the ban shareholders and managers approved the banks disastrous expansions (Pratley, 2011;

Wilson et al, 2011) even though those expansions were seen as precariously financial transactions (House of

Commons Treasury Committee, 2009).

Fuelled by modest and cheap credits, RBS substantially increased their leverage as a result. For instance, the debt-

equity level of RBS increased from 60.1% in 2005 to 86.2% in 2008 (RBS Report,2008). In other word growth asset

was not keeping up with the ever-increasing level of debts.

6.3 Regulators

Following the financial Services Act 2012, the FSA ceased to exist, the two new regulatory authorities; The Prudential

Regulation Authority (PRA) and The Financial Conduct Authority (FCA) were put in place. The PRA which is part of

Keep satisfied

State, UK Tax

payers, Regulators

Key players

Managed closely

UK Government,

Investors.

Minimal effort

Advocacy Groups,

Public, Market

Keep Informed

RBS Staffs,

Advocacy

Groups, State

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Bank of England is to create a stable financial system in the UK to help ensure stability. The PRA was given the

responsibilities for the prudential regulation of RBS pre-financial crisis (FSA, 2012).

The financial crisis rapidly eroded public trust in UK banking institutions (RBS, 2015), Establishing RBS as a

genuinely local bank with an explicit mandate to serve the public interest would go a long way to rebuild trust in the

banking as a whole.

European Union Economic Directives 2006/48/EC adopted by UK before the Brexit vote may also make

recommendations to RBS UK. EU Policy Makers could work with the bank bodies and business leaders to encourage

them to place greater emphasis on interests to achieve corporate goals, given its broader social implications, especially

in the wake of the financial crisis (Financial Times, 2009).

Regulatory intervention and structural changes will affect the bank growth and expansion couple with low interest

rates 4%-4.5% in 2000-2006 and now 0.5%. RBS must maintain good relations with their New stakeholders; however,

difficult this remains in applying.

6.4 Risk

RBS Directors were expected to exercise judgement to balance objectives according to the conditions and

circumstances they serve, with the application of due diligence and appropriate expertise (Burnes, 2009). It shall aim

to generate profits, but generating profits is not the primary purpose of the bank (RBS.com, 2014).

A further complication was that the bank inclined to gamble and were overly confident about their own abilities. Prior

research has suggested that the bank often display over-confidence when it comes to difficult tasks and over-

estimation of their own abilities (Shefrin, 2007).

The problem, however, is RBS actually control neither the value of the firm nor share prices. Instead, they have

control over those drivers which only indirectly affect share prices, such as strategy, costs, capital investment and

human resource deployment, which in turn influences revenue, profits and returns on capital, as well as growth

(Beinhocker, 2006)

A study by Russo and Schoemaker (2012) demonstrated that RBS had the tendency to believe that they actually

possess more knowledge than their counterparts. One potential problem with the bank over-confidence is that

executives had higher tendency to engage in takeovers in order to expand revenues and pursue growth (Malmendier

and Tate, 2008), and it failed spectacularly.

6.5 Innovation

RBS has IT legacy challenges frequently from ageing and maturing IT confronted by mergers & acquisition it

neglected to modernize and failed to respond to technology savvy customers. It did not revolve enough to shape and

adapt to new business opportunities (Bloomberg business news, 2014), (PA Money news, 2016) RBS made a net loss

of more than 26,000 customers including NatWest sister bank.

RBS was impacted by IT failures incidents severely and appropriately compensation and fines were paid by the bank

for such failures affecting its operations in the UK and Ireland. The bank internal processes were a lso affected it

17


experience backlogs, job loss and queues in its systems interfering with each other because of this multiple problem

with the bank IT system this did not help with the group risk management system and risk assessment of the bank

operations per and post financial crisis. The bank is taken immediate steps to improve IT capabilities and

recoverability of legacy capabilities, a new framework of internal system and software to improve its risk assessment

process parallel with less complex and cost effective approached delivering more improve customer service by

delivering more improve systems.

New entrants into a market are an important source of competition and innovation for RBS, and are well aware of the

current barriers in UK retail banking. What’s really holding them back is their ability to highlight to customers how

New offerings are compare with current deals.

6.6 Mergers and Acquisitions

The ability to cut costs in the previous merger of RBS and NatWest awarded the necessary credentials to Fred

Goodwin, then CEO at RBS, to follow an aggressive expansion strategy through acquisitions. The assumption is that

banks work best when held in private hands, and that government ownership of banks always introduces inefficiency

and market distortions. However, these are assumptions that are challenged by the financial crisis with RBS.

Frooman (1999) suggests that RBS managers were enable themselves to achieve the business interests, and

management of the bank. The successful acquisition and integration of the three-times larger NatWest enabled the

CEO to persuade shareholders to stretch the bank’s capital reserves to absorb ever-larger acquisition targets (Larsen,

2009). In other words, management does have a monopoly to influence RBS strategies.

In many ways, the decline of RBS in the UK has led many critical of big banks, not surprising as the potential to

reckless decision making and the excessive use of leverage has been shown with RBS and Group in the UK. RBS

should follow approach likely to develop bank-specific management practices that are customised to their New

Stakeholders’ and organisational objectives (Russo and Fouts, 1997).

7.0 CONCLUSIONS AND RECOMMENDATIONS

The unanswered question is whether privatisation is really the best strategy for RBS, or whether there is an alternative

that will create more economic benefit for the country as a whole, including taxpayers. In many ways, the decline of

RBS in the UK has led investors been critical in bridging gap to restore confidence, and RBS needs to reflect on their

own mistakes. It is difficult to imagine the scale of the consequences for the economy and society if RBS had been

allowed to collapse. The Treasury was justified in using taxpayers’ money to safeguard savings stabilise and restore

confidence in the financial system.

Deregulation created global rivalry and New bank models however, lack of competition, transparency, fairness, poor

management culture and structure, and complex customer environment led to the decline in RBS Group. When the

bank was bailed out at the height of the global financial meltdown eight years ago it global ambitions has been scaled

back undermining the bank's long-term standing future.

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The introduction of new regulations, structural changes due to government interventions and risk monitoring to

managed management and executives’ conducts can make RBS a safer investment and sustainable bank, leading to

restoring market and banking sector in general confidence. These developments within RBS may lead to optimistic

signs of economic recovery and financial stability within the bank.

New package of banking reforms will help RBS get stronger foothold in a market which is of vital importance to the

whole economy, however the bank is reporting record loss. RBS reported £2bn half-year loss as it is still plague with

legacy, legal claims and compensation payments which have held back profit, but RBS is remains to be a strong bank

and its taking these shocks.

19


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Bibliography Figure: 1. Global financial effect

Figure: 2. RBS share prices 2008

Figure: 3. Banks market shares

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Figure:4 Bailout amounts

Figure: 5 RBS Ownership during and pre-crisis

Figure: 6 RBS Ownership statistics

Figure: 8 RBS Litigation graph

Figure: 9 RBS litigation charges

Figure: 10 RBS lending to energy sector

Figure: 11 RBS Stakeholder power matrix

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