Not only this, but the flaws in the supervisory approach of the Financial Services Authority provided insufficient challenge to the firm, according to the FSA’s report on the failure of RBS, published today.

The FSA identified six points as causes of the failure.

• Significant weakness in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework
• Over-reliance on risky short-term wholesale funding, permitted by an inadequate approach to the regulation of liquidity;
• Concerns about RBS’s underlying asset quality, which was subject to little fundamental analysis by the FSA;
• Substantial losses in credit trading activities which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit could be.
• The ABN AMRO acquisition which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence;
• An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure, including RBS.

Together these decisions suggested underlying deficiencies in RBS management, governance and culture.

The FSA investigation was conducted between May 2009 and December 2010. No enforcement action was taken against RBS as the report concluded the three cases investigated would have been unlikely to succeed.

FSA chairman Lord Turner proposed two key policy areas where changes should be considered.

He said major bank acquisitions should require explicit regulatory approval and secondly a public debate about changes to laws or remuneration policies would ensure bank executives and directors face personal consequences as a result of bank failure.

The full report is available here