MortgagesNov 19 2015

Five things about report into demise of Hbos

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Five things about report into demise of Hbos

At a cost running into millions of pounds, the Prudential Regulation Authority and the Financial Conduct Authority today (19 November) delivered their report on what went wrong at Halifax Bank of Scotland.

Here are the five keys findings from the 407-page report:

1) Better blame those bankers

Remember when Hbos accounted for 20 per cent of the mortgage market?

The report found the group put itself under pressure and as margins declined on all forms of lending, a search for yield pushed it towards more risky propositions.

Each of the lending divisions experienced an increase in its risk profile to grow income levels, with the report stating a ‘key feature’ of the balance sheet was its concentration in property, particularly the commercial variety.

The board failed to identify the extent to which Hbos was moving up the risk curve as a result of ambitious growth plans, so by 10 September 2008, the balance sheet was no longer in a state to handle the run on the banks that followed.

Hbos faced what is described as an “unexpected funding need” of £12.5bn in the week after Lehman Brothers failed. By 18 September Lloyds TSB had taken over Hbos.

The report concluded that the board and senior executive management failed to set an appropriate strategy and also failed to challenge a flawed business model that placed inappropriate reliance on continuous growth, without due regard to the risks involved.

2) ‘Light touch’ approach of FSA at fault

Remember a time when then chancellor Gordon Brown used to say boom and bust was a thing of the past? Well the report found the Financial Services Authority fell for that hook, line and sinker.

The FSA was found to be regulating on the basis that financial stability, meaning regulation of financial firms should be ‘light touch’ and too trusting of firms’ management.

The report showed that oversight by the FSA board, led by chairman Sir Callum McCarthy, was insufficient.

However the FSA’s successors and producers of this report said a major contributor to this failure was international standards of prudential regulations for banks, which were inadequate in the case of capital adequacy and absent in the area of liquidity regulation.

3) Loose lips cost bank lives: role of the media

On 19 March 2008, a British bank was rumoured in the markets to be facing severe strain, including difficulties securing funding amid ‘pessimistic chatter’ following the collapse of Bear Stearns - after which UK bank shares fell between 2 per cent and 13 per cent, with Hbos being the worst performer.

Some of the rumours identified Hbos by name and contended the governor of the Bank of England cancelled his Easter travel plans in order to resolve a liquidity problem at Hbos.

The rumours led to Hbos’s share price falling 17 per cent during the course of the day, during which Hbos, the FSA and the Bank all made statements to calm the markets and restore stability. But by April 2008 Hbos announced it would raise capital via a rights issue of £4bn.

4) Hbos management in denial

During their tenures as group chief executive, the regulators found James Crosby and Andy Hornby played a fundamental role in reinforcing a culture within the firm which leaned heavily towards growth and performance.

In interviews, both denied that they pushed a growth culture. Nevertheless, the regulators found plentiful evidence to suggest they did just that.

Hbos’ remuneration policy for senior management was focused on profitability and had no explicit requirements to consider risk, according to the report.

As chairman of Hbos throughout its lifetime, the regulator’s report also concluded that Lord Stevenson bore responsibility, individually and collectively as a board member, for the failings of the board.

5) James Crosby’s FSA involvement isn’t an issue

For a significant portion of the period being reviewed by the regulators, James Crosby was both Hbos chief executive and a member of the FSA board.

Mr Crosby became chief executive of Hbos in 2001 following the merger of Halifax with the Bank of Scotland. He continued to be employed by Hbos in the role of chief executive until he was succeeded in this position by Andy Hornby in mid-2006.

Mr Crosby was appointed to the FSA Board in December 2003 and took up this appointment in January 2004. He was a member of the FSA’s audit committee, serving as its chairman from July 2005 to September 2007, assuming the role of deputy chairman and chairman of the FSA committee of non-executive directors on 11 December 2007.

Mr Crosby announced his resignation from the FSA Board on 11 February 2009 following allegations of inappropriate changes made to the group regulatory risk function at Hbos during 2004.

Claims made by Paul Moore, former head of group regulatory risk at Hbos, included the allegation that Mr Crosby had not complied with Hbos’ HR policies in making Mr Moore redundant and in appointing Jo Dawson as group risk director.

The allegations were fully investigated by KPMG and the FSA, concluding that the changes made by Hbos were appropriate.

Today’s review found no evidence that Mr Crosby exercised any undue influence as a member of the FSA board or its committees on the decisions of the regulator in relation to the supervision of Hbos.

emma.hughes@ft.com