“Fools rush in where angels fear to tread,” wrote the poet Alexander Pope three centuries ago - around the same time as the venerable Bank of Scotland was established. Heeding the warning allowed the bankers to grow the bank slowly but steadily into a solid, safe fixture of the Scottish and, latterly, English economies.
A parliamentary report published today catalogues the foolish ambition which led to the collapse not just of Bank of Scotland but also Halifax, the biggest mortgage lender at the time when they merged in 2001. In less than a decade, centuries of prudent banking history was swept aside by senior managers described today as “incompetent and reckless.”
The Parliamentary Commission on Banking Standards pulls no punches in the report, naming - and very much shaming - Sir James Crosby the chief executive from the formation of HBOS until 2006 and his successor Andy Hornby, who led the bank until its demise. It singles out Lord Stevenson, the chairman of HBOS for the whole period, for particular blame; not just for overseeing a doomed strategy but also for heading a management team which displays even now “an almost wilful blindness to the weaknesses … [of] their own strategy.”
Of course, virtually every bank in Britain was hit by the credit crisis that started in 2007, and Northern Rock and RBS were very visible casualties. Like them, HBOS had over-reached itself, lending more than it took in deposits – but on an epic scale. In 2002 its largest single loan was £963,000. By 2008 the largest named loan was £2.9 billion, with a further nine loans of over a £1 billion. It funded this with money borrowed from other banks – and came a cropper when that inter-bank lending seized up in the credit crunch.
The size of the losses at RBS was larger yet as a proportion of its books, the losses at HBOS were double as high. Three million shareholders in HBOS were wiped out and around 40,000 jobs will have been lost as a result of the collapse. Taxpayers had to stump up an extraordinary £30 billion in total to bail the bank out. The fallout was enormous yet a lack of expertise meant the executives were “incapable of understanding the risks that some elements of the business were running,” says the report, “let alone managing them.”
Until now, only one executive has been censured and fined for that failure. The Commission makes sure the blame is spread further and calls for punishment for the other executives who have so far got off scot-free. It also highlights the failure of the regulator – the Financial Services Authority – and asks tough questions about its behaviour. The fact the FSA ceased to exist this week (its role taken over by a new body at the Bank of England) removes much of the impact from whatever answers it gives.
So where does this leave us? The Treasury says: "The failure of HBOS was a symptom of the financial crisis and the regulatory system in place at that time. The Government is committed to learning the lessons of the past and protecting taxpayers from bank failures in the future.”
The Commission isn’t making its own recommendations yet, that’s something to look forward to later this year in its final report. On the evidence of today’s report, it will make unpleasant reading.