A striking feature of Hbos’s failure is how the FSA did not appreciate the full extent of the risks the bank was running and did not take sufficient steps to intervene before it was too late, a report concluded today.
In a 407-page report published by the PRA and FCA today (19 November), it is stated the FSA board and executive management failed to ensure that adequate resources were devoted to the supervision of large systemically important firms such as Hbos.
According to the report this failure gave rise to a risk assessment process that was too reactive, with inadequate consideration of strategic and business model related risks.
The report also concluded the FSA has insufficient focus on the core prudential risk areas of asset quality and liquidity in a benign economic outlook; and placed too much trust in the competence and capabilities of Hbos senior management and control functions.
Insufficient testing of Hbos management and challenges were carried out by the FSA, the report adds.
However despite listing many areas where the FSA failed in their supervision of Hbos, the report concluded ultimate responsibility for the failure of the mortgage lending giant rests with the bank’s board.
The demise of Hbos resulted in £20.5bn of taxpayer’s money being required to bail the bank out.
The report states: “Supervisors need to employ their judgement and take appropriate actions in response where necessary.
“A particular challenge is to intervene sufficiently early when a firm is apparently successful but supervisors can identify weaknesses that are sufficiently important to pose a threat to the firm that is inconsistent with the objectives of supervision. Hbos was such a firm.”
Today’s report comes after several years of delay.
As far back as 2012 the Financial Services Authority promised to publish a document into the demise of Hbos ahead of its division into the Financial Conduct Authority and Prudential Regulation Authority.
The following year Andrew Tyrie, chairman on the Treasury select committee, appointed the special advisers to oversee the report demanding it give a full and frank account of the bank’s post-crisis collapse.
By 2014 the promise was that the findings would be available by the end of the year, but as late as this summer there was still no firm date for its publication, with Mr Tyrie expressing his frustration at the delays.
In July, he stated: “Once the review has concluded, I will be asking the Treasury committee’s independent reviewers to give the committee their views on the reasonableness or otherwise of these delays in the process.”
Today’s report is far from being the first into the demise of Hbos.
Back in 2013, James Crosby, former chief executive of Halifax Bank of Scotland, was stripped of his knighthood after he was described by MPs as the “architect” of the collapse of HBoS, in a highly-critical report published by the Parliamentary Commission on Banking Standards.
The parliamentary report also highlighted failings by Mr Crosby’s successor Andy Hornby and chairman Lord Stevenson.
The parliamentary report also criticised the FSA for failing to monitor the growth and assets at Hbos after 2004.
Timeline for what went wrong at Hbos
2001- Hbos was created by the merger of the Bank of Scotland and Halifax. Chief executive James Crosby gave a public target for the new group to increase the return on equity from an underlying figure of 17 per cent in 2001 to 20 per cent by 2004.
2002 - An FSA review identified serious concerns about the group’s control functions.
2003 - FSA expressed concern about the failure by Hbos to properly address the findings of the 2002 review by increasing the capital requirement on the bank by 0.5 per cent to 9.5 per cent.
2006 - Sir James Crosby knighted for contribution to financial services. Andy Hornby replaces Sir James as chief executive.
2007 - An evaluation by the FSA of points raised in its previous Arrow reviews concluded that many of the issues had been addressed and could be closed. Sir James appointed deputy chairman of the FSA.
2008 - The FSA wrote to Peter Cummings, Hbos’ head of corporate lending, to inform him that the review had identified shortcomings in the sphere of credit risk management and processes.
In October 2008 Hbos received a government bailout and was taken over by Lloyds.
2009 - Paul Moore, former head of risk for Hbos, told the Treasury select committee that he had been sacked by Sir James for raising concerns about risky lending.
This led to Sir James resigning as deputy chairman of the FSA.
He claimed that Mr Moore was dismissed as part of a restructure.
2012 - FSA censures Hbos but decides not to levy a fine in order to save taxpayers’ money. Mr Cummings was fined and banned from financial services.
2013- MPs call for regulator to consider bans from financial services for senior Hbos executives after report highlights individual and regulatory failures.
emma.hughes@ft.com
