This crisis was caused not by market failure but by systemic incompetence within the banking’s sectors most regulated arm – the commercial. RBS’s lending exceeded its capital by a multiple of 50, a strategy that was, to put it decorously, completely bloody reckless. It is unthinkable that the Treasury and the FSA were unaware of RBS’s sense-averse business model; therefore, regulators condoned RBS’s risk.
The lunacy hasn’t abated; the government is maintaining the tri-partite system that contributed directly to the disintegration of global credit markets. George Osborne is correct that root-and-branch reform of regulation is a pressing and immediate concern, lest the same mistakes are repeated.