Analysis: Indictment of far from conservative bank

THE opening passage of the report on the failure of HBOS by the Parliamentary Commission on Banking Standards launches forth with the high-falutin’ phrase, “a lack of corporate self-knowledge at the top of the organisation”. Was that all that went wrong?

It is a most deceptive opener. The report is an unsparing analysis of what went wrong at HBOS, a scorching account of specific failures and a lacerating condemnation of top executives by name.

Don’t heap all the blame, it concludes, on Peter Cummings, the head of corporate banking. The primary responsibility, it says, lies with Sir James Crosby, chief executive between 2001 and 2006, his successor, the hapless Andy Hornby, and especially Lord Stevenson, HBOS chairman throughout.

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Public censure is not enough. The commission recommends the Financial Services Authority (FSA)should examine whether these three individuals should be barred from any role in the financial services sector.

By the most galling irony, Crosby, on leaving HBOS, went on to become deputy chairman of the FSA. That’s the same FSA the report witheringly condemns as “not so much the dog that didn’t bark but the dog that barked at the wrong tree”.

What clearly emerges from the report is a management at HBOS convinced to the end, and even beyond, of its own superior judgment and prudence. Its self-image, says the commission, “was one of a conservative institution”.

It is true the HBOS group was created out of two conservatively run institutions – Bank of Scotland, under the lauded, cautious stewardship of Bruce Pattullo, and the Halifax, which, until its flotation as a public company, was Britain’s most successful and stable building society.

The grand folly of the merger was a belief that this conservatism was being continued, when in fact it embarked on the most aggressive, asset-led growth across all divisions over a sustained period. Crosby demanded the return on equity be raised from 17 per cent in 2001 to 20 per cent by 2004, a dramatic rise in performance that saw lending expand faster than deposits. Group lending compounded at an annual rate of 13 per cent between 2001 and 2008.

At its height. HBOS was valued on the stock market at £40 billion. When the financial crisis struck, 96 per cent of that evaporated.

The managers at the top, steeped in retail experience, had little grasp of the business of banking. Given their ineptitude, perhaps the only surprise in retrospect was not that HBOS collapsed, but that the myth of its “conservatism” prevailed for so long.