The Investigation Into The Impact Of Financial Crisis On RBS

PROJECT

The investigation into the

impact of financial crisis on RBS

Tutor:

Student number: 8

Date: Friday 27 April 2018

1. Abstract

The crisis of the banking system in the year 2008 did affect different societies

globally. The economy was expected to continue growing but it did decline as

the rate of unemployment rose, there was a rise of debts which led to the loss

of confidence by the political leaders who thought they could not manage well

their problems. The banking system did fail the people and the people did lose

confidence. According to analysis all the people 100 percent were worried

about the assurance of banks. The financial crisis led to poor performance of

investments. Capitalism of many investors around the world is tied to the

market. The savings, cost of properties and stocks and shares are what drives

the investment and all this had a negative effect on the economy. There were

decreased levels of the interest rates and this therefore reduced rate

investments. Thirdly, the impact led to increased anxiety in the way the

banking system and the growth of the economy of the country. The concern

showed that the people were affected negatively and their attitude towards the

growth of the economy was negative. The British people did not believe

anymore in the management of the banking system. Lastly, the data shows

that every British citizen had been affected by the financial crisis and their

negative attitude rose because they had to pay high taxes, therefore, reducing

the disposable income for every British adult citizen.

2. Introduction

The financial markets in the World are the backbone of a well-functioning

economy. They enable the directing of capital resources to its most productive

use in the market. More the financial market allows the pooling of risks in the

market by providing an insurance policy against the negative effects in the

markets. This allows the investors and the manufacturing companies to

maximize their resources for a stable outcome and thus growth in the

economy. Furthermore, the positive transformation liquidity of a country can

grow when there are a financial intermediation and the sharing of risks.

Individuals are allowed to bank their savings with a trust that they will use it at

any given time and with the long-term investment they are assured of an

illiquid investment. According to King and Levine, the countries with high

growth in the financial markets, are always assured of a faster development of

industries and improved technology, more so, they tend to rely on the external

funds to improve the rate of investment in the country. The failure of the

Royal Bank of Scotland in the year 2008 has been a great failure to the UK

citizens because of the large costs. The financial crisis has been affected

mainly by the recession of the economy of the UK which the Royal Bank of

Scotland had played a very important role. The recession period had

increased unemployment rate in the country and the loss of wealth and

income. The continuous effect to the market has led the market to continue

struggling with the economy of the country.

3. LITERATURE REVIEW

3.1

Explain purpose & outline of Literature Review (LR)

This chapter will summarize different researches about the change and decline

of Royal Bank of Scotland (RBS) during the financial crisis in 2008. It will review

the history of the Royal Bank of Scotland, followed by reasons behind the

decline of RBS.

3.2

General Historical background to RBS

Beginning as a small bank, RBS developed into one of the most famous

banks around the world over the past 290 years. The development of RBS

could be summarized as “incorporate and acquisition”. In 1864, it acquired

Dundee Banking Co; in 1924, it acquired Messrs Drummond of London; in

1930, William Deacon’s Bank; in 1939, Glyn, Mills & Co. In 1969, it merged

with National Commercial Bank of Scotland. In 1982, RBS acquired Lockerbie

Saving Bank; and in 1985, Annan Savings Bank (RBS, n.d.). It also acquired

Natwest, the British high street bank in around 2000 (Farrelly, 1999).

I choose it because the RBS used to be as one of the largest bank in the

world. In 2008, Royal Bank of Scotland (RBS) jumped from eighth to third in

the world bank list which is calculated of equity, accumulated reserves and

earnings that have not been paid out as dividends (The world’s biggest banks,

n.d.). However, now Royal Bank of Scotland has reported a new £7bn loss –

its ninth consecutive year deep in the red – which has taken its total losses

since the 2008 financial crash to more than £58bn. The 73% taxpayer-owned

bank said it would not return to profit until 2018 (Treanor, 2017). This report

will find the reason behind the decline of RBS.

3.3 The cause of crisis

2.2.1 Questionable Growth Model of “Merge and Acquisition”

The growth model of RBS is typical as “merge and acquisition”. This kind of

growth model makes RBS bigger in scale, but may not make it more profitable.

In his analysis, Kemal (2011, p.157) used accounting ratio to analyze the

financial performance of RBS in Pakistan after mergers, Kemal drew the

conclusion that the merger of RBS failed to pull up its profitability (Kemal, 2011,

p.162).

Besides the potential of not increasing profitability, the aggressive growth

model of merge and acquisition creates asset concerns and uncertainties.

Through the merge and acquisition, RBS did expand its scale; however, it

also caused the public’s concerns because the public had no idea of the scale

of future loan losses. And this uncertainty contributes to the loss of confidence

in RBS (FSA, 2011, p.39).

2.2.2 The decline of Confidence in Banking System

In 2008, the market came to realized the risks coming with the complex

interconnectedness of the banking and shadow banking systems. Thus, all

banks became difficult to liquid its capital. The difficulty was extreme huge for

RBS because it was in poor condition of asset quality, capital adequacy and

liquidity (FSA, 2011, p.39).

3.4 The result of crisis

The “merge and acquisition” development model made RBS one of the largest

banks around the world. However, it also led to the biggest crisis it faced in

history. In 2007, it made up its decision to buy ABM Amro in a €72 billion deal.

The acquisition was not healthy (Telegraph, 2010). In December 2007, RBS

had to reveal its write-down of 1.5 billion Euros and in April, 2008, it

announced another write-down of around 6 billion Euros (The Guardian,

2011). In October 2008, the price of RBS fell from 195p per share to around

85p, which led to the bailout of the British government by takes a 58pc in RBS

for 15 billion Euros (Telegraph, 2010). In addition, more than £45bn of

taxpayer funds have been injected into the Royal Bank of Scotland.

3.5 Public reaction and response to the bail out by RBS

For the politician, the Gordon Brown who is the former prime minister. He

supported to give billions to the banks. He contended that the bail-out was

vital to save jobs and businesses. He spoke to Angela Merkel, Nicolas

Sarkozy and other European leaders to urge them to recapitalize their banks

as well (Rawnsley, 2010).

For the public confidence for the banking between 2008 and 2009 , only 13%

believe it is true that ‘people who work in investment banks in the City of

London generally behave honestly’. For the bank reputation, RBS is at the

bottom of the list with 51% scoring it negatively and just 11% positive (net -

40%). Barclays has a net negative of -22% while Lloyds Banking Group is net

negative -20%. Also negative are Santander (-13%) and HSBC (-1%). We

should note that 54% think the banking industry is ‘getting worse’, but a mean

of the seven main banks shows just 11% saying individual banks are ‘getting

worse’.

In 2017, Our new International Omnibus study finds that that 55% of British

people trust banks. In good news for financial institutions, we find that two

thirds (67%) have confidence that banks they use are competent and know

what they are doing. However, RBS has run eight successive years of losses

amounting to a total of £50 billion, and despite repeated pledges to improve

customer satisfaction, RBS was ranked bottom out of more than 30 banks for

customer satisfaction in a recent survey carried out by consumer group.

The differences between now and past is that the total trust for banking

industry increase. People believe the banking industry become better and

also confidence in it. However, for the RBS, it still has the low confidence

among people.

4. Methodology

The purpose of this chapter is to describe the methods used in this project. In

order to collect data about the change and decline of Royal Bank of Scotland

(RBS) during the financial crisis in 2008. Questionnaires have been carried out

and the result would be more valuable.

The questionnaire consists of three parts. In the first part, one questions about

personal information of the respondents were asked. In the second part, six

questions showed more detail information the attitude on financial crisis. The

questions were designed with either single choice or multiple-choice.

20 questionnaires are delivered to British people in April 2018 and the response

rate was 100% because it was conducted face to face. The questionnaires are

given at two different places (Commercial Road and Library) . The

questionnaires are

delivered at different times in order to increase the variety of the sample

according to age, gender.

5. Findings

5.1 The findings of the 2018 questionnaire

The project is interviewed 25 people who had different attitudes on the financial

crisis in Scotland. The 20 is valid and the 5 were invalid. As from the data

presented most of the age of the people did range from 20-30 years old. This

was mostly youths whose expenses are still dependable on income. They are

believed to have the highest number that was affected by the financial crisis.

The question in the questionnaire was about what they had felt did influence

the financial crisis. The Bank did influence most of the financial crisis in the

country, 70% picked the bank as the main problem to the poor economy. The

20% picked the real estate to believe that there were excessive investments in

the real estate and did leave the country with too much debt to handle. The

financial crisis did have a large impact on the life of the people (n=13 picked

yes, 6=no). The data collected on the attitude of the banking industry was

categorized into three parts with different opinions (n=5, getting worse, n=5

moderate and n=3 well). The financial crisis affected the bank's reputation as

the people lost faith to the services provided by the banks (n=5, yes and n=4

depend on the situation). Almost 80% of the people did believe the banks

should be protected when a financial crisis happens to protect its image in the

working environment. Currently, does the trust of our bank services still exist in

the society (n=18 yes and n=2 No). The trust in the bank services has improved

due to the improved services they have provided over the years and the

government intervention has brought trust back to the people. The attitude

towards the Royal Bank of Scotland is medium as from the data collected (n=10

medium, 8=satisfied and n=2 dissatisfied). The government has learned from

its mistakes which led to a recessive economy (n=18, yes and n=2 No).

Compare and Contrast 2008 and 2018 Results

The financial crisis has many core characteristics both in 2008 and in the year

2018. The first comparison years have a collapse of assets in the markets.

The real housing prices have continued to decline to improve the price

because of too many investments. This continuous decline in the price of the

real house investments is related to the fluctuation of the economy which is

unstable. Secondly, the two periods are characterized by the increase in debt,

in 2018 it has been reported that there is overinvestment which happens with

borrowed money from financial institutions and this is what resulted to the

collapse of banks back in 2008 financial crisis. The two periods seem to have

problems with management due to poor policy makings because of an

economy with too much available credit often ha investors who are often

overconfidence when making decisions. In 2018, the consumers have shown

signs that they not confident with the services of the bank and mainly the

stability of the economy because most of them have become less willing to

invest even though they are advised too. The less confidence of consumers

as compared to 2008 financial crisis that led to fear of consumers to invest

and purchase in goods.

Declaration

I hereby declare that the project work entitled “The investigation into the

impact of financial crisis on RBS” is a record of an original work which I have

done on my own. I have done research on this thesis on my own except for

the quotation which has been duly acknowledged. This thesis is still to be

reviewed and marked because it has not yet been accepted for any degree

and more so is not simultaneously submitted for the award of another degree.

Sign:

Student Name:

Date:

Ethical Issues

There are 25 questionnaires in total which are delivered to the British

people in April 12

2018 during 1:30pm-3:30pm and the response rate was

100% because it was conducted face to face. The questionnaires are given

at two different places (Commercial Road and Victoria Park).

The questionnaires are delivered at different times in order to increase the

variety of the sample according to age, gender and the different attitude

they possess.

The whole questionnaire is set to start from a shallow format to deep in

order to make the interview more acceptable for interviewees.

The effectiveness of using questionnaires is they provide an easy way to

gather large amount of information in a short period of time. More so, large

amount of answers can get in a short period.

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