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December 11, 2012 7:21 pm
The public humiliation last week of Sir James Crosby and Lord Stevenson at the Parliamentary Commission on Banking Standards has reawakened attention in one of the worst failures in British banking history, the collapse of HBOS.
Although the crash of Royal Bank of Scotland Group in 2008 resulted in bigger losses, the fall of HBOS, a much smaller company, which was just 11 years old, was more extreme. RBS lost five per cent of its of its loan book, HBOS a staggering 10 per cent. Losses of £45bn more than wiped out its capital.
The Financial Services Authority has so far sought to pin the blame on one man, Peter Cummings, former head of corporate banking, the unit responsible for half of HBOS’s losses. But the parliamentary commission, with access to board minutes and internal reports, has revealed £15bn was lost in Ireland and Australia, £2.5bn in the retail mortgage book and almost as much in treasury dealings. Mr Cummings had nothing to do with these losses.
The commission is likely to demand the FSA investigation be reopened. That would be welcome. The collapse of HBOS wiped out 3m shareholders and will have led to 40,000 job losses, once restructuring is complete. The real story must come out and those responsible be held to account.
Further investigation should focus on why the board and executives repeatedly missed warning signs. HBOS had an elaborate risk control and corporate governance structure. But the commission has shown senior risk managers lacked the authority to damp the dominant sales culture at the bank. At board level, star name non-executives also lacked the heavyweight banking experience to challenge the corporate banking team. Finally, neither Sir James, HBOS’s longstanding chief executive, nor Andy Hornby, his successor, were career bankers. The result was an institutional focus on aggressive expansion.
HBOS was formed in 2001 by the merger of two conservative institutions, Halifax, a former building society, and the 300-year-old Bank of Scotland. But the new team at the top – Sir James, Lord Stevenson as chairman, and the youthful Mr Hornby recruited from Asda, the supermarket group – had high ambitions and a radical strategy. From the beginning they projected the company as the new force in British banking, marked out by the fastest growth in the sector.
Already the leader in residential mortgage lending, HBOS surprised its rivals by aggressively attempting to grab an even larger share of the highly competitive market. At the same time it was expanding rapidly in corporate lending and carving out a niche in foreign markets. For the first five years the strategy seemed to work. Profits and the share price soared, but then Sir James unexpectedly resigned. Not yet 50, he had no other job to go to.
For a while Mr Hornby continued the same strategy. But as profits from the group’s dominant retail division faltered, HBOS came to rely on its distinctive style of corporate lending – placing big bets on high-profile entrepreneurs in highly leveraged deals concentrated in commercial property. It also often took an equity stake – an unusual, high-risk approach.
As the commercial property market stalled, then crashed, in the wake of the credit crunch, other banks pulled back, but HBOS kept lending. By the end of 2008 the game was up. Despite Lord Stevenson’s protestations that the bank was sound, which attracted ridicule from the commission last week, it had run out of capital.
In evidence to the commission, Mr Hornby and Lord Stevenson clung to the idea that the closure of wholesale funding markets, rather than poor lending, sank the bank. But in 2001 the bank’s very first business plan had identified reliance on wholesale markets as a weakness, and in 2006, HBOS’s head of treasury told fellow executives that planned growth was unsustainable. Even so, lending continued to outstrip deposits to the extent that by 2008, HBOS’s funding gap was bigger than that of RBS, Lloyds TSB, Barclays and HSBC combined.
The commission rightly rejected the wholesale markets excuse. By highlighting instead the failure of the board to monitor and control risky, high-value loans, it has taken a first step towards a proper accounting for one of the sorriest chapters in British banking history.
The writer is author of ‘HUBRIS: How HBOS wrecked the best bank in Britain’
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