RBS’s problem child

Statement from Central Bank of Ireland

In 2009, the Central Bank imposed an obligation on the Firm [RBS Irish subsidiary, Ulster Bank] to hold €339 million in additional Pillar II capital as a buffer against the risks (over and above credit, market and operational risk) to which the Firm was exposed. In the Firm’s regulatory return submitted to the Central Bank on 31 March 2011, the Firm reported a capital shortfall in relation to its Pillar II requirement of €313 million. The Firm immediately received a capital injection from its parent company Royal Bank of Scotland Group plc (“RBS”) to rectify the issue. The Firm made significant amendments to its Capital Management Programme following a review of the issues which highlighted that the primary cause of the failures was due to inaccurate capital forecasting and other capital management control issues.

The Regulations seek to ensure that credit institutions have sufficient capital to support all material risks they are exposed to. Credit institutions are obliged to hold capital for credit, market and operational risk (Pillar I Requirements). The Regulations set out a framework for the assessment of additional risks relevant to a particular credit institution over and above credit, market and operational risks (Pillar II Requirements). The contraventions identified in this case relate to the Firm’s Pillar II Capital Requirements.

This is part of an announcement that Ulster Bank has settled claims relating to contraventions of capital and liquidity requirements via correction of the lapses, beefing up procedures, and a fine of, er,  €2 million. Now, the first read-through of the statement has something of the flavour of those moments in Inception when you think they’ve exited from a nightmare only to find that they’re still in one: Irish banks, mismanaged liquidity and capital requirements, lax controls, inadequate information submitted to the supervisor … and it happened in 2011!

One reason CBI went relatively easily on Ulster Bank was “the Firm had access at all times to sufficient liquidity and capital during the period as part of RBS.” Which sounds a lot like an implicit cross-border subsidy at a time when banks are supposed to local in life and not just in death. RBS management hasn’t made much secret at their frustration about the way Ulster Bank caused large losses for the overall group. Is there a point at which they decide to get out entirely?

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