Combination of ambition and incompetence led to collapse

HBOS was created in 2001 from the merger of the Bank of Scotland (BoS) and Halifax with the aim of becoming the UK’s fifth banking ‘super-power’.

But that ambition proved the bank’s downfall as it hugely over-reached, refused to heed the warning signs and ultimately crashed leaving the taxpayer to pick up a multi-billion pound bill.

HBOS was born out of what might have been considered a happy match at the time. The Halifax was one of the leading personal mortage and savings operations while BoS brought more commercial and corporate expertise to the merger.

Hide Ad
Hide Ad

At the end of 2001, HBOS had total assets of £275bn, larger than Lloyds TSB and three-quarters of the size of Barclays and of RBS. In its first annual report, HBOS described itself as the “new force in banking”.

It sought to rapidly expand, setting ambitious targets for growth. Today’s Parliamentary Commission report notes that from the outset that “HBOS pursued a strategy of asset-led growth, expanding its lending significantly faster than its deposits. Total group loans grew at a compound rate of 13 per cent over the 2001-08 period, excluding the impact of acquisitions and disposals. Customer deposits rose by only 8 per cent per annum during the same period.”

By January 2004, the Financial Services Authority (FSA) was already warning HBOS that “growth had outpaced the ability to control risks”. The Group’s strong growth, which was markedly different than the position of the peer group, may have given rise to “an accident waiting to happen”.

But as the Commission report found: “Neither the FSA nor HBOS followed through on the implications of this characterisation. The accident happened. HBOS failed, with dramatic consequences for its shareholders and for the taxpayer.”

Hide Ad
Hide Ad

Former chief executive Sir James Crosby has previously admitted that “incompetence” led to the bank’s crash in 2008.

Much of the proposed growth came from a rapid expansion in corporate lending. This, in turn, led to an ever-increasing reliance on wholesale money markets – borrowing from big institutions through securitisations and bond issues, rather than customer deposits.

HBOS also became dangerously exposed to individual borrowers.

The rapid rise in large individual credit exposures is laid bare in the Commission’s report which notes that the largest single name loan approval rose from £963,000 in 2002 to £2.9bn in 2008, with a further nine names in excess of £1b.

Hide Ad
Hide Ad

The speed of expansion and increased scale of lending was unsustainable and left HBOS vulnerable to any economic downturn.

When the wholesale money markets collapsed in 2007 after the US sub-prime mortgage crisis arrived on UK shores, the writing was on the wall for HBOS.

HBOS had lost about £11bn in the Irish property market, part of £15bn international losses.

Its impairment or bad debt levels surged to more than 10 per cent of the loan book during the financial crisis, double that of Royal Bank of Scotland.

Hide Ad
Hide Ad

An attempted a £4bn rights issue failed and in 2008 fears of a run on Britain’s biggest mortgage lender forced a Government-brokered takeover of HBOS by Lloyds. The deal was completed in January 2009, with the taxpayer pumping in £20bn to take a 43 per cent stake. Lloyds Banking Group has since axed more than 30,000 jobs.

Related topics: