RBS would have done well to have heeded the past example of the City of Glasgow Bank, the ghost of which has stalked Scottish banking since its collapse and bankruptcy in 1878. Infact this collapse came just twenty one years after the collapse of the Western Bank of Scotland in 1857, from which the lessons had already supposedly been learned. In a time when Scotland's 'public' banks (those with Royal Charters), the Bank of Scotland and Royal Bank of Scotland had very conservative lending and deposit regulations, as well as very small branch networks, banks such as the City of Glasgow Bank attracted a great diversity of business and personal customers from the new middle classes. Many investors from the middle classes were also shareholders. What was unknown to most of these customers was that the bank's directors had fallen into the influence of a small group of Glasgow merchant houses which managed to borrow (a then) large sum of £5m between them with no likely repayment schedule. By comparison the deposit base was £8m; eventual net liabilities were shown to be £6m. Money had also been lost gambling on US railroad securities, and in gambling on mining stocks and in Australasian farming.
The bank was closed suddenly by the directors on the 2nd of October 1878; the doors of each branch were locked and there was no possibility of a Northern Rock style run. Rumours about the security of the bank had been circulating for some months on the London market, where confidence in the bank's bills had been falling. The closure of the bank rendered this paper useless, as well as making it impossible for depositors to reach their funds. At this time there were no government bailouts for banks, nor government deposit insurance. Depositors were eventually fully repaid from calls for payment made to the shareholders, who eventually faced calls of £2,675 against a £100 holding. At this time banks did not have limited liability as it was thought this would reduce public confidence in them; this meant the shareholders were liable for all of the bank's debts. Many of the shareholders themselves ended up being made bankrupt, although they were given shares in the Assets Company Ltd., which pooled many of the bank's remaining assets which were still of value, giving them some recompense in the longer run. And the directors? They didn't just lose their jobs - they were sent to prison.