The banking sector Royal Bank of Scotland (RBS) wasestablished inthe year 1727by aRoyal Charterof King'George I', theNational Westminster Bank (NatWest),which can trace out its findings back to1650, andUlster BankinIreland.

RBS is a British owned banking sector and insuranceholding companyin which 85% of the controlling share is hold byTreasury. And it is managed and held byFinancial Investments Ltd of UK. The origin of this group is in Edinburgh,Scotland, and it is the world's biggest company by assets.

The RBS group has established a "Human Capital" model that relates a range of "Human Resources" metrics with business performance indicators. RBS has recognized 'employee engagement' as the vital fickle in this process. Employing more than 100,000 staff all over the world, the Royal Bank of Scotland group includes some of the well-known brands as NatWest, Tesco Personal Finance, Coutts, Ulster Bank, Green Flag and Direct Line Insurance as well as the Royal Bank of Scotland itself.

De-regulation: It can be defined as a process of removing, reducing or simplifying government control on business and on individuals with the aim of encouraging the efficient performance in the markets.

Every industry in the market has certain rules and regulations that it must stand by. These rules and regulations are made by industry society and by government. So we can say that when the government takes back its rules and regulations a bit therefore it starts loosening its hold on particular sector of the market.


Role of de-regulation in the financial crisis faced by the RBS:

RBS has taken it into extremely problematic period for the global economy and in the banking sector. So RBS has been into financial crisis and many financial service organisations in the world have been deteriorated by the crisis in the international financial markets and weakened economic situations. This state made RBS worse, as some of their main strategic plans were subsequently shown to be bad mistakes, making them more susceptible than they would have been.

In the meantime RBS started recognizing where did they committed mistakes and acted to resolve the difficulties as soon as possible and have fixed in place a widespread restructuring and new strategic plan to recover individual strength. This has become a top priority for the new management team and Board of RBS. The support of the UK taxpayer gave them enough privileged position when they are restructuring. This privilege exists because of their central role in the UK economy and society. This role gave them the responsibilities to change both the business they do and the way they do business; which they are already doing. They thought to make purposeful progress each and every year. But in the meantime they already began a programme of reducing the costs and aligning the Bank's performance to the reality of them situation. In the process of restructuring their main focus is on the needs of customers.

In general, the purpose of deregulation is to give a particular industry to boost its competition by creating open marketplace and at the same time increases its economic growth. So we can say that, when an industry or sector becomes de-regulated it gets big opportunity for itself in order to improve its brand name, products, and policies and at last appeal to more customers. So, de-regulation in financial sector gives us the information regarding how the different variety of legislative and economic events takes in order to achieve the monetary policy, public sector financing and sectoral assistance objectives.

RBS has shown disappointing performance in the year 2008 covered tough underlying performance, and profitability. It will be their core businesses, across the world, but located in the UK, which will be the focus for them as they try to re-establish shareholder value.

On the 22nd April 2008 RBS announced arights issuewhich was aimed to elevate �12bn in new capital to offset awrite-downof �5.9bn resulting from credit market positions, in order to boost up its assets by the purchase of ABN AMRO. The bank also told that to raise further funds it would reconsider the opportunity of divesting some of its subsidiaries, remarkably its insurance divisions"Direct LineandChurchill". "Churchill and Direct Line" at present remain as part of RBS Group.

Later on 13th October 2008, in a process it aimed at restructuring the bank; it also asked that the British Government have to take a stake of up to 58% from its Group. The aim was to "make accessible new tier 1 capital to UK banks and building societies to restructure their finance by building up their property, while at the same time giving their support for the real economy, through the scheme of recapitalisation so it is accessible to all eligible institutions. TheTreasurywould impart �617 per citizen of the UK which is equivalent to �37bn of new capital into RBS Plc,Lloyds's TSBandHBOSPlc, to prevent financial sector from collapsing. The government worried about that, it was not "standard public ownership" and at the right time the banks should return to private investors.

Chancellor of the ExchequerAlistair Darlingtold that taxpayers of UK would gain from the government's rescue plan, so that the government can have the control over RBS on preference share in exchange of �5bn and the additional �15bn in ordinary shares. If shareholder take-up of the share issue is about 0% and 100% then the total government ownership in RBS would be about 58% and 0% respectively. In this case they would be less than 56 million new shares were taken up by the investors.

As a result of the mismanagement which necessitated this rescue theChief Executiveof the group has given hisresignationwhich was duly accepted and also the chairmantold that he will step down from his position when his contract expires i.e., on March 2009.

On 19th January 2009 the British Government announced to release additional funds into the banking sector of UK in an attempt to regenerate personal and business lending. This would enable to restore the banks confidence which involve the creation of a scheme i.e., "state-backed insurance" which allows banks to insure against existing loans going into default. On the same day itself government told to convert the preference shares in RBS to ordinary shares. So as a result it would remove a 12% coupon payment on the shares values of approximately �600m per annum.

The diamond set of national influences of porter's theory helps to understand the comparative position of a nation in global competition. Porter argues that the theory of endowment given by Heckscher and Ohlin are very basic to analysis a nation-state's competitive advantage. Comparative advantage is too shorter to see as a 'divine inheritance'. He says that international success in a particular industry is determined by four broad factors which create an environment and enables these firms to compete. The four factors or determinants are demand conditions, factor conditions, related and supporting industries and firm structure, strategy and rivalry. These determinants are influenced by the nation's government and also by chance events.

Government plays very crucial role in the porter's theory of a 'diamond set of national influences'. The main role government in this theory is "to act as catalyst and challenger", which gives enough encouragement to the companies or industries to raise their aspirations and to achieve higher levels of competitive performance.

Government must encourage to:

  • Boost organisation to increase their performance for example by maintaining strict product standards.

  • Encourage early demands for advanced schemes.

  • Focusing on creation of specialised factor.

  • Stimulation of local rivalry by limiting direct collaboration and imposing antitrust rules and regulations.

The key area of Government in Porter's model is to influence the four determinants through its policies. In fact, it appears that Government policies have influenced the four factors to such an extent that it alone could be used to analyse trade patterns. Porter says that the polices implemented by the Government creates an simulated national competitive advantage (NCA) and it also helps to remove the pressure on firms which indirectly effects on the firms growth and upgrade is counterproductive (acting against the achievement of the aim). He says that these policies will not succeed because they create a competitive advantage which cannot sustainable in the long run due to the pressures in this competitive marketing environment and continuous improvement. Porter says that the Governments' role is to reinforce factors not to generate competitive advantage.

The UK financial sector is mainly consists of retailing industries, banking sector which comprises of commercial banking and multinational foreign banking, the London stock market, mortgage companies and so on. The financial sector of UK is involved in all recessions that have occurred or may occur over time. Usually banks plays major role in providing finance to other sectors of the economy which in turn achieves economic growth.

To function as a profitable concern, every bank must and should follow their own and desired corporate culture. So that their business can function properly and can implement better risk management policies and practises, maintaining good relationships with lending guidelines and policies, have proficient staff that are supportive and work in as a team member so that it is possible for the banks can maintain good bankers and customers relationships and continue to function as a profitable concern. In the event of banks becoming bankrupt (insolvent) i.e., unable to pay debt and crumple. Some superior banks such as the Bank of England must come to help as the banker of the last option, so that they can pay their depositors money in full amount to all the depositors who want their money back. The government should stand as a financial guarantee for the banks to help them out from the event of bankruptcy. This is possible for the Government by making use of the taxpayers money to help them as a short-term measure only until the troubled banks can function normally and do their business properly again. So the UK government can make use of Porter's theory of a 'diamond set of national influences' which helps them to protect the competitive advantage of the financial services. And by taking into account the following five steps to provide competitive advantage for financial sector.

  1. The UK government has to make international regulation work. It should not support controlling arbitrage even if it expects to gain in the short run.

  2. It must ensure that the people at the helm of affairs of the financial bodies internalise most of the costs of their actions.

  3. Government must not accept egregious (extraordinary in some bad way) special requests from the industry.But the sector says that moving by-products trading on to exchanges might damage inventions. So we can say that exploiting invention is a crazy objective. For example in medicines, there exist trading between innovation and safety. If organizations threaten to take trading activities offshore, banking licences can be removed.

  4. Government should try to diversify the budget away from finance, in order to generate strong comparative advantage within it and also to generate a steady and encouraging environment for business accomplishments.

  5. The risks which are processed by institutions should make sure that they will fall within the financial and governing capacity of the British state. The country should show the risks which are generated by inefficient support and under regulated foreign organisations. At last, it is most important that the government should not undermine the rules and regulations generated by other governments to control their own institutions.

All over the world most of the banks lend money to each other, which generates long-term investments in other banks. And, if any one bank reduces lending i.e., by keeping the cash itself, then all the other remaining banks will also reduce lending which is known as Credit Crunch. Thus, we can say that Credit Crunch is a result of all the banks reduces lending at the same time, and it means that no one is able to borrow money straightforwardly.

Till 2006 there was no term called 'Credit Crunch'. But one of the day in 2007 just distant rumours of something wrong in America; so the next day itself (in 2007) queues of worried customers i.e., the depositors etc nervous to empty the vaults of their savings in case the entire structure fall down in branches of Northern Rock. Even though its origin is from the US housing market, all over the world the term 'Credit Crunch' has echoed in households and businesses, providing enough evidence that if anyone has a doubt then we and our money inhabit a strictly globalised economy.

The credit crisis has begun in August 2007, when interbank lending markets in the UK, US and Europe began to seize up. The public attention to these markets was very little and it is not obvious that why this should have happened. It is not just that essential in circulating the credit amongst banks from overnight to several months i.e., the loans on interbank markets and also among almost all economic agents in the market and there was no necessity of security for the loans. Thus as a result they were made increasingly important to the banking model developing across market economies. This model mainly relied on wholesale markets for supplies of capital, when compared to the individual deposits or industries. At this moment the degree of leveraging i.e., investing the borrowed money as a way to increase potential gains on capital was also growing rapidly. Thus we can say that with larger supplies of credit and greater leveraging it's possible to get higher profits.

These higher profits or levels of business indicates that there is higher risk involved, which makes banks in increasing rates of return to satisfy their shareholders and also the wages and bonuses of their employees were linked to levels of business or profits.

There was a problem with the insurers and it's not a new one but during the time of risk aversion it is taken into keen focus. This issue is same as what the banks have in the way of assets and liabilities and at last how they can solve the problem. This problem seems to be very tough. After all, the insurance sector had a good credit crunch. It is not possible for the UK's big insurers to call their shareholder's for fresh capital (unlike the banking sector) even though they did raise billions of pounds through disposals, bond issues, securitizing policies and in some cases by ceasing to write new business.

The increasing levels of risk seemed to be difficult, but it can be manageable by the process of securitization. This basically allows the banks to simultaneously sell on the risk and replenish its capital. The weakness of this banking model has been exposed when they is rapidly deflating housing market in the USA and also in UK, Ireland and Australia, so the value of security assets and location eventually led to removal of trust firstly between the banks and then other financial and non-financial sectors.

By the year 2009 there was lack of trust in the financial sector but which is sufficiently enough to seize up complete credit flows and make treat to the stability of the world financial sector. But the financial system was in turn broken and by October 2008 a coordinated action by large numbers of central banks and countries was needed to stabilize it.

This made in giving extensive promises of state security to depositors, huge investment of capital to banks, vast liquidity supplies to fill the financial sector and providing guarantee to all short term bonds. So we can say that all the above responses have public finance consequences which include expenditures and tax revenues, also risk and uncertainty are the same time still growing.

From the above scenario we conclude that the cause for recession is due to credit crisis. Risk in public finance is mainly caused by recession. The expenditure from unemployment and interrelated social requirements i.e., mostly from health and housing has increased risks. And also at the same moment tax revenues fall more than output as fiscal risk goes into reverse. Budget shortages have increased, even public debt also increased as a proportion of GDP, and the exchange of sovereign credit may increase.

In conclusion we can say that the Credit Crunch has led to significantly increase risks and uncertainty to public finance which in turn has the involvement of government in financial sectors of the advanced market economies. Moreover risks come from the overheads of the resulting world recession. The pre-requirements for an overdue restructuring of both the national and international and also public finance regimes create very high costs and it is not possible to estimate.

Now coming to RBS, Royal Bank of Scotland has recorded the second biggest ever loss by a British bank. RBS showed a disappointing performance in its first four decades i.e., a loss of �691m and after writing off almost �6bn because of the credit crunch. RBS said that its business operations and write downs of risky assets remained stable, but its earnings would be held back by the global credit crunch. Almost every bank has seen a rapid fall in the value of their credit market assets and at the same time RBS has taken the decision of raising extra capital or funds to restore its balance sheet to lasting health. It planned a right issue about �12bn which makes it the largest in European history and equal to third of RBS market value.

Source: Essay UK - http://ntechno.pro/free-essays/finance/banking-sector-royal-bank-of-scotland.php


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