“An accident waiting to happen” is how the Parliamentary Commission on Banking Standards described the HBOS debacle in its report in April. HBOS was born in 2001 from the merger of the Bank of Scotland and Halifax, which had been Britain’s biggest building society before it was demutualised in 1997, and in 2001 had 22 per cent of the mortgages market and 16 per cent of retail savings.
From the start HBOS adopted a “wildly ambitious growth strategy”, expanding its lending much faster than its deposits in what the Commission called “an asset-led, high-risk approach to growth”. Deposits grew at 8 per cent a year between 2001 and 2008, against asset growth of 13 per cent. The shortfall was covered by aggressive “wholesale funding”, where basically banks and other financial institutions lend to each other.
There was also a rapid increase in individual credit exposures: loan growth averaged 14 per cent a year, which the Commission said was based recklessly on “substantial risks”. In September 2002 the largest amount loaned to an individual was £963,000. Within six years the largest single name approval was £2.9 billion and there were nine individuals lent more than £1 billion.
HBOS also aimed to grow aggressively abroad, particularly in Ireland and Australia, concentrating on property and construction. The property crash happened in Ireland but the company even managed to lose money in Australia, where there was no recession.
In 2004 the Financial Services Authority (FSA) told the HBOS board that the group had outpaced its ability to take risks and that it was “an accident waiting to happen”. Yet the Authority only told HBOS to tighten its monitoring procedures. The FSA also highlighted HBOS’s “high degree of exposure to property”. In 2005 the Board acknowledged its reliance on wholesale funding was a “significant risk” and that HBOS was “structurally illiquid”. In 2006 the bank’s own advisers warned the board that in the longer term the position was “untenable and unsustainable”. In March 2008 there was an outflow of funds which was stemmed by a statement from the FSA.
In September 2008, after the collapse of Lehman Brothers, depositors – particularly corporate and overseas customers – withdrew £30 to £35 billion from HBOS. In the ensuing “credit crunch” wholesale markets seized up and HBOS was unable to raise sufficient funds to cover its outflows. On 1 October, 12 months after the run on Northern Rock, HBOS received Emergency Liquidity Assistance from the Bank of England and it was taken over by Lloyds TSB. 98 per cent of the supposed value of the company of £40 billion had evaporated, and £8.5 billion of public money went directly to the company to take it over. Without the cash injection, HBOS would have been insolvent. ■