Royal Bank of Scotland Group plc (LON:RBS) has experienced a tidal wave of regulatory scrutiny, civil litigation and high profile corporate faux pas ranging from its part in the recent FX and LIBOR rate manipulation and the mis-selling of insurance products, dating back to the controversy surrounding its election of senior executives.
Today, the firm has made its way back into the mainstream news once again, this time as a result of a technical failure which has caused 600,000 payments to effectively disappear from the bank’s system overnight.
According to a report today by the Daily Mail, hundreds of thousands of people have not been paid and scores of direct debits were not delivered as a result of the error which affected customers of NatWest, Coutts, Ulster Bank and RBS.
Furious customers today told of being put on hold for more than an hour when trying to resolve the issue after checking accounts to discover they had not been paid.
The report continued to detail that RBS has stated that it could take until Saturday for payments to reappear with the bank refusing to reveal whether everyone affected would be given cash to tide them over until then.
Whilst the bank has confirmed that it will ensure that the payments are ratified, the consequences of so many late payments are likely to be severe in some cases.
Indeed, this is not the first example of a glitch of this nature within the bank, a previous example being summer 2012’s IT error which happened at NatWest/RBS which started in similar fashion, before it transpired a system failure hit millions.
RBS is one of the largest interbank FX dealers in the world, however its retail banking business is also a vast enterprise. The firm’s highly expensive few months which have involved the settlement of regulatory and civil penalties which extend into the hundreds of millions have compounded its less than fruitful previous year.
The firm recently retracted from the US market by selling its stake in Citizens Bank in order to raise $3 billion.
Since Fred Goodwin left his leadership position after the firm almost collapsed before the British government stepped in to take an 80% shareholding in RBS, his proposed ABN AMRO takeover having caused insolvency of the bank. The €71 billion (£55 billion) ABN AMRO deal (of which RBS’s share was £10 billion) in particular stretched the bank’s capital position. £16.8 billion of RBS’s record £24.1 billion loss is attributed to writedowns relating to the takeover of ABN AMRO.
It was not, however, the sole source of RBS’s problems, as RBS was exposed to the liquidity crisis in a number of ways, particularly through US subsidiaries including RBS Greenwich Capital. Although the takeover of NatWest launched RBS’s meteoric rise, it came with an investment bank subsidiary, Greenwich NatWest.
RBS was unable to dispose of it as planned as a result of the involvement of the NatWest Three with the collapsed energy trader Enron. [clarification needed] However the business (now RBS Greenwich Capital) started making money, and under pressure of comparison with rapidly growing competitors such as Barclays Capital, saw major expansion in 2005-7, not least in private equity loans and in the sub-prime mortgage market.
It became one of the top three underwriters of collateralised debt obligations (CDOs). This increased exposure to the eventual “credit crunch” contributed to RBS’s financial problems.
The third contributor to RBS’s problems was its liquidity position. From a position around 2002 where the bank was essentially ‘fully funded’ (i.e. was funding its lending positions fully from deposits gathered from customers), the rapid growth in lending within the GBM (Global Banking and Markets) division led to a reliance on external wholesale funding. The combination of this, along with the weak equity capital position, and the massive exposure to losses on CDOs via Greenwich, were the factors that destroyed RBS.
The bank experienced severe financial problems, and attempted to shore up its balance sheet with a £12 billion share issue in April 2008, one of the largest in UK corporate history. The attempt to raise an additional £7 billion capital by selling off insurers Churchill and Direct Line failed due to lack of interest in the context of the global liquidity crisis. RBS was forced in October 2008 to rely on a UK Government bank rescue package to support a shareholder recapitalisation of the bank, which resulted in the government owning a majority of the shares. Following two rights issues in 2008, Fred Goodwin resigned as Chief Executive.
Sir Philip Hampton, RBS’s new chairman, stated that as a result Goodwin is drawing £693,000 a year which was later revised to £703,000 due to Goodwin working an extra month in the new financial year, and disclosed that under the RBS pension scheme Goodwin is entitled to draw the pension already, at age 50, because he had been asked to leave employment early, rather than having been dismissed.
This meant that Mr Goodwin had received a substantial payoff from his early retirement, as it would cost around £25 million to buy such a pension and his pension ‘pot’ amounted to £16 million, causing controversy among investors and taxpayers as the firm had become an insolvent burden on the public purse.