Halifax guilty of loans misconduct

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HALIFAX Bank of Scotland’s business lending arm was guilty of “very serious misconduct” before and during the financial crisis, the City watchdog has ruled.

The bank’s enthusiasm for increasingly high-risk loans and culture of “optimism at the expense of prudence” between January 2006 and March 2008 left it deeply exposed to the downturn, the Financial Services Authority said yesterday.

The taxpayer was left holding more than 40 per cent of Lloyds Banking Group after its Government-brokered takeover of HBOS in early 2009.

But HBOS will not be fined to avoid the taxpayer paying twice, said the FSA.

Its damning report on Bank of Scotland, HBOS’s Edinburgh-based business lending arm, said the company would other otherwise have received a “very substantial” penalty.

“The very serious misconduct of the firm contributed to the circumstances in which HM Government acquired approximately 43.4 per cent of the enlarged ordinary share capital of Lloyds Banking Group,” said the FSA.

HBOS was one of the highest profile British casualties of the financial crisis, along with Royal Bank of Scotland, Northern Rock and Bradford & Bingley.

Merging HBOS and Lloyds has already resulted in almost 32,000 job losses, and Lloyds warns at least 11,000 more will follow.

HBOS was created in 2001 from the merger of Bank of Scotland and Halifax, a former building society.

The FSA said: “Between January 2006 and March 2008, (BOS) corporate pursued an aggressive growth strategy, with a specific focus on high-risk, sub-investment grade lending.

“Further, corporate continued to do so as market conditions began to worsen in the course of 2007. The firm did not take reasonable steps to assess, manage or mitigate the risks involved in the aggressive growth strategy.”

The BOS corporate division lent to companies and entrepreneurs, with a particular focus on property firms. It was the riskiest part of HBOS with three-quarters of its loans sub-prime.

Ambitious lending targets at the bank encouraged staff to see risk management as a “constraint on the business rather than integral to it”, said the FSA.

The division pursued an “aggressive” strategy, doing deals of “increasing size, complexity and downside risk”.

By late 2007 the credit crunch had already forced a Government bailout of Northern Rock, plus the collapse of two Bear Sterns hedge funds.

But the FSA said despite this BOS did not pull back from high-risk commercial lending, but actually chased market share.

At the start of 2006, commercial property loans totalled £44.4bn and made up 52 per cent of BOS’s lending. By the end of 2008 this had risen to £68.1bn or 56 per cent. These loans for projects such as office blocks and housing developments were highly vulnerable to the downturn, leading to huge defaults as property values crashed.

The FSA said the corporate division ignored warnings from its risk assessors and auditors KPMG, and was “optimistic” in its treatment of bad debts.

HBOS’s Halifax retail banking arm was not censured in the report.

The FSA said it still plans to report into what went wrong at the wider HBOS group, but does not want to prejudice ongoing legal action by starting this yet.

No individuals were named in the BOS report, which includes a series of redacted paragraphs.

A Lloyds spokesman said: “This will help to draw a line under the events in question and allow the group to move forward.”