You’re in the too big to fail camp then. All banks have interdependencies. The failure of any bank is nothing which shouldn’t be able to be handled effectively by regulators. They could be insolvent but still be operational until sold. As happens with companies in administration.
Northern Rock, Lehmans etc went pop, so should have RBS. Nothing to do with the origins of certain key politicians at the time, I’m sure.
No, almost all of the above is wrong.
You are correct that banks have dependencies for their funding, that is completely normal, and is intended to spread risk.
But, at the time, RBS were the biggest bank in the world in terms of assets (whether they were genuinely assets is moot at this point), and had achieved fast and aggressive growth by funding themselves and almost all of their lending on a daily basis.
Small c conservative banks fund their lending full term, i.e. if they grant a $100m loan to a client for 5 years, then they borrow $100m for 5 years from the market at a slightly lower rate, and will generally have a mortgaged asset such as a factory or aircraft that can be sold if the client can’t pay. The failure of one or even multiple deals is therefore unlikely to quickly destroy even a small bank.
RBS by contrast totted up their funding needs daily, and borrowed whatever they needed on an overnight basis. This gives a lot of flexibility, and is obviously cheaper for the bank. Some capital was reserved in cash, but only a very small percentage compared to most other banks. Of course, not all loans and other instruments are repaid in full every day, so every single day they had to borrow from the markets the same as yesterday, plus or minus whatever deals had repaid or drawn down. The total amounts they were borrowing had gone up in a huge leap when they paid €67Bn (£49Bn) to take over ABN Amro, and unknowing ownership of a large number of poor quality assets. The total outstanding loan book was around or possibly over £500Bn, I can’t recall exactly.
On the 7th October 2008, RBS were unable to borrow enough from the markets to cover their daily funding requirements. A combination of their weakening share price, other bank and client defaults, plus awareness spreading of the likely risk that RBS could not cover it’s losses meant that other banks were unwilling or unable to provide sufficient liquidity. They would therefore have been unable to pay back what they owed on that day, and without Darling and the BoE stepping in with an immediate £20Bn, RBS would have instantly and totally collapsed on the spot. It would not have been possible to operate a collapsed and defaulted bank even on a skeleton basis, as they would literally have had no working systems or money to pay anyone, least of all their thousands of employees.
All the other banks that were owed billions would have suffered significant if not fatal damage as the contagion spread, and the systems that RBS directly operated such as WorldPay (card payment transactions, card machines, all Link, Mastercard and Maestro ATM’s, online transactions) and SWIFT (payment instructions between financial institutions, bank secure messages, Letters of Credit & Guarantees) would have failed worldwide, instantly and completely.
All RBS, NatWest and Ulster Bank customers would have been unable to use their accounts for an unspecified amount of time, and may have lost everything as there was no deposit protection scheme at the time. Lehmans, Bradford & Bingley and others had already collapsed, but losses to the public and banks were tiny by comparison, and they did not operate global payment systems. RBS most likely would have crashed all the other banks and therefore the entire global economy if it had failed.
I do not however think that they were too big to fail. There’s no reason even such a huge lender could not bear the very worst financial storms, as long as they are sufficiently capitalised and regulated.
This is why deregulation in this field (Thatcher, tories in general and brexit) are not always good things, whereas ‘EU red tape’ including the ever-tightening Basle capital adequacy requirements, most certainly are.