Bank guarantee cost Ulster Bank €865m

ULSTER BANK, a subsidiary of Royal Bank of Scotland, lost £732 million (€864.9 million) in deposits in the four days after the Government introduced the bank guarantee in September 2008, a report into the failure of the nationalised British bank found.

The report by the Financial Services Authority said the guarantee, which did not cover Ulster Bank as it was foreign-owned, “further intensified pressure on RBS’s liquidity position following the failure of Lehman Brothers”.

Seven days after the guarantee, RBS began borrowing emergency funding from the Bank of England and eight days later, was recapitalised by the British government with £20bn (€23.6bn) to prevent its collapse.

Ulster Bank was described as “a significant contributor” to the expansion of RBS, increasing at an average rate of 26 per cent a year, from loans of £27.7bn (€32.7bn) at the end of 2004 to £55bn (€65bn) at the end of 2007. Only RBS’s investment banking unit was growing at a faster rate, the report found.

Total assets at RBS, one of the fastest growing banks in the world during the boom years, grew from £588bn (€695bn) at the end of 2004 to £2.4 trillion (€2.8 trillion) at the end of 2008.

The FSA referred to a presentation by RBS for 2005 in which the bank said Ulster Bank had grown its mortgage book by 31 per cent.

The report showed Ulster Bank had bad debts of £4.4bn (€5.2bn) between 2008 and 2010 on loans of £19bn (€22.4bn) on property loans, including commercial investment and residential development.

The total loan impairments increased from £275m (€325m) in 2008 to £1.3bn (€1.5bn) in 2009 and £2.7bn (€3.2bn) the following year.

The FSA found it “seems likely” RBS senior management and its board were not sufficiently aware of the total exposure to commercial property across its divisions, including Ulster Bank.

The FSA report found the impairments on the Ulster Bank loans amounting to 7.5 per cent of the bank’s end-of-2008 loans was the highest of any division at RBS.

Bad loans within Ulster Bank’s commercial and development property loans, at 22.15 per cent, amounted to the second highest at RBS by category, the report found.

The cumulative losses reflected “the scale of poor corporate property lending in Ireland, in which RBS participated”, the report said.

The FSA found regulators had considered placing a cap on commercial property lending at RBS in 2005 but decided it was unnecessary.

“With hindsight it was an opportunity lost, given RBS’s decision to continue to increase commercial property lending in Ulster Bank, UK corporate banking and GBM [RBS’s investment banking division] with the resulting concentration of risk and the subsequent losses,” the FSA report said.