HBOS report says bank would have collapsed even without crisis

Defence of Irish business suggested ‘almost wilful blindness’ to weaknesses of directors’ strategy

Bailed-out British lender HBOS was so badly run it would have failed even without the 2008 financial crisis and the regulator should consider banning its former bosses from the industry, according to a damning report from the British Parliamentary Commission on Banking Standards.

The report, published on Friday, said that HBOS was an "accident waiting to happen", with bad lending and losses across the business likely to have led to its insolvency even without the funding and liquidity problems of the financial crisis.

It also details the banks activities in Ireland where HBOS "took what it saw as the relatively quick and easy path to expansion without acknowledging the risks inherent in that strategy".

The report says that estimated impairments in Ireland between 2008 and 2011 totalled £10.9 billion,equivalent to 36 per cent of the loan book at the end of 2008; 60 per cent of impaired loans in Ireland at the end of 2011 related to exposures to commercial real estate.


It states that while all leading Irish banks incurred significant impairments, as a result of the recession, the losses at HBOS as a proportion of loans were greater than those of all but the former Anglo Irish Bank.

"In two markets alone – Australia and Ireland – it incurred impairments of £14.5 billion in the period from 2008 to 2011. These losses were the result of a wildly ambitious growth strategy, which led in turn to significantly worse asset quality than many of its competitors in the same markets. The losses incurred by HBOS in Ireland and Australia are striking, not only in absolute terms, but also in comparison with other banks. The HBOS portfolio in Ireland and in Australia suffered out of proportion to the performance of other banks. The repeated reference in evidence to us by former senior executives to the problems of the Irish economy suggests almost wilful blindness to the weaknesses of the portfolio flowing from their own strategy."

The committee said regulators bore some of the blame, but primary responsibility lay with Dennis Stevenson, chairman from the formation of HBOS in 2001 until its collapse, and former chief executives James Crosby and Andy Hornby. There was a "colossal failure of senior management and the board", said Commission chairman Andrew Tyrie, a Conservative lawmaker who expressed surprise that only Peter Cummings, who was head of corporate lending at HBOS, had so far been punished.

"The Commission has asked the regulator to consider whether these individuals should be barred from undertaking any future role in the sector," Tyrie said in the report.

Following the report, Mr Crosby resigned as an advisor to private equity firm Bridgepoint. He is also senior independent director at the world's biggest catering company, Compass , which declined to comment on his position. Mr Cummings was fined £500,000 by Britain's financial services regulator in September and banned for life from the industry.

HBOS, Britain's biggest mortgage lender, had to be rescued with a government-engineered takeover by rival Lloyds, which subsequently needed a £20-billion bailout to survive.

Mr Hornby, who since leaving HBOS has worked as chief executive of healthcare group Alliance Boots and is currently the boss of betting shop chain Coral, declined to comment on the report. Coral, however, had nothing but praise for Mr Hornby, and a spokesman said his position was safe.

Lord Stevenson, who sits in the House of Lords, could not be reached for comment.

HBOS was created in 2001 by a merger between Halifax, a former mutually owned savings and loans firm, and the 300-year-old Bank of Scotland. It ramped up lending using cheap funding on the wholesale markets rather than safer customer deposits, and its high-risk strategy was exposed when that funding dried up following the collapse of U.S. investment bank Lehman Brothers in 2008.

HBOS's managers blamed the financial crisis for the collapse, but the Commission said the bank's business model was inherently flawed and its board was a "model of self-delusion". "The sums would never have added up," Mr Tyrie said. "The Commission has estimated that, taken together, the losses incurred by the corporate, international and treasury divisions would have led to insolvency, regardless of funding and liquidity problems, had HBOS not been bailed out by both Lloyds and the taxpayer," he said.

The Commission said £25 billion was lost on bad corporate loans, and there were losses of £15 billion at its international business and £7 billion at its treasury unit. The report said the role played by Britain's financial regulator had been "thoroughly inadequate". It said the Financial Services Authority, which was closed down at the beginning of April, had identified some of the issues that would eventually contribute to the bank's downfall but failed to follow through on its concerns.

Britain's treasury said the failure of HBOS was a "symptom of the financial crisis and the regulatory system in place at that time". It said the introduction of a tighter regulatory regime would help prevent future failures. The responsibilities of the FSA have been passed to two new bodies, the Financial Conduct Authority and the Prudential Regulation Authority. Crosby was chief executive of HBOS between 2001 and 2006 before being succeeded by Hornby.

- Bloomberg/Reuters