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Financial Accounting for Decision Makersfinancial-accounting-for-decision-makers-ninthnbsped-9781292251356-1292251352 compressBanking on change
The taxpayer has become the majority shareholder in the Royal Bank of Scotland (RBS).
This change in ownership, resulting from the huge losses sustained by the bank, will shape
the future decisions made by its managers. This does not simply mean that it will affect the
amount that the bank lends to homeowners and businesses. Rather it is about the amount
of risk that it will be prepared to take in pursuit of higher returns.
In the past, those managing banks such as RBS saw themselves as producers of finan-
cial products that enabled banks to grow faster than the economy as a whole. They did not
want to be seen as simply part of the infrastructure of the economy. It was too dull. It was
far more exciting to be seen as creators of financial products that created huge profits and,
at the same time, benefited us all through unlimited credit at low rates of interest. These
financial products, with exotic names such as ‘collateralised debt obligations’ and ‘credit
default swaps’, ultimately led to huge losses that taxpayers had to absorb in order to pre-
vent the banks from collapse.
Now that many banks throughout the world are in taxpayers’ hands, they are destined to
lead a much quieter life. They will have to focus more on the basics such as taking deposits,
transferring funds and making simple loans to customers. Is that such a bad thing?
The history of banking has reflected a tension between carrying out their core functions
and the quest for high returns through high risk strategies. It seems, however, that for some
time to come they will have to concentrate on the former and will be unable to speculate
with depositors’ cash.
Source
: Based on information in Peston, R. (2008) We own Royal Bank, BBC News, 28 November, www.bbc.co.uk.
Real World 1.6
REASONS TO BE ETHICAL
The way in which individual businesses operate in terms of the honesty, fairness and trans-
parency with which they treat their stakeholders (customers, employees, suppliers, the com-
munity, the shareholders and so on) has become a key issue. There have been many
examples of businesses, some of them very well known, acting in ways that most people
would regard as unethical and unacceptable. Examples of such actions include:
■
paying bribes to encourage employees of other businesses to reveal information about the
employee’s business that could be useful;
■
oppressive treatment of suppliers, for example, making suppliers wait excessive periods
before payment; and
■
manipulating the financial statements to mislead users of them, for example, to overstate
profit so that senior managers become eligible for performance bonuses (known as ‘cre-
ative accounting’).
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