RBS boss says reforms have cut chances of bank failures

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The boss of state-controlled lender Royal Bank of Scotland said Tuesday that global banking reforms will "significantly" lower the chances of more failures in the troubled sector.

Bank capital ratios -- a key measure of core capital set against outstanding assets, such as loans -- have been increased by many regulators to strengthen the banks' foundations and help prevent another crisis.

RBS chief executive Stephen Hester, speaking at Glasgow University, argued on Tuesday that bank capital ratios are now much stronger than they were before the global financial crisis erupted.

"The extensive reforms to capital, liquidity and risk now under way will significantly reduce the probability of failure but rightly not remove its possibility," Hester said at the annual conference of the European Economic Association.

"The essential complement, then, is to ensure that financial institutions can be safely resolved and if bailed out, it should be by shareholders and creditors, not the state," he added.

RBS is 83-percent owned by the British government after the lender was rescued in the world's biggest bank bailout at the height of the economic turmoil. Rival bank Lloyds is 41-percent state-owned after a similar bailout.

Hester blamed recent banking failures on factors that included inadequate risk controls, failures in management and an over-dependence for funding on wholesale markets -- which froze when the credit crunch erupted.

However, he added that potential failure was an important factor for the market to function properly.

"It is important to the proper functioning of the market that we do not remove that possibility of failure -- that would embed entirely the wrong incentives around risk-taking.

"The next, and in many ways the most difficult step, then, is to ensure that banks can fail but in ways that minimise the impact of that failure on the wider economy."

RBS scraped into a first-half profit during the first six months of the year. The lender made a modest net profit of nine million pounds (11 million euros, 14 million dollars) in the six months to June compared with a loss of 1.04 billion pounds in the first half of 2009.

© 2010 AFP

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