Whereas Royal Bank of Scotland is still at the forefront of the UK’s political and financial landscape nearly seven years after its collapse, HBOS is almost a distant memory. The failure of HBOS was almost as spectacular as that of RBS but the damaged brand was swept under the carpet with the bailout from Lloyds Banking Group in October 2008.
The bank was submerged into the larger group and only its smaller parts – Halifax and Bank of Scotland, among others – remain as its legacy.
Ray Perman’s book, Hubris: How HBOS wrecked the best bank in Britain, charts the history of the original Bank of Scotland and its destruction. It is an excellent read, plotting the bank’s steady, 300-year rise from 1695 to 1995, followed by a 15-year near-disintegration.
The Treasury select committee has already published a damning report on HBOS’s demise. It slammed reckless senior management and resulted in former CEO James Crosby rescinding his knighthood and slashing his pension payments in shame.
It also led directly to a new senior managers’ regime in the City, meaning executives have more direct responsibility and liability. This includes a radical new criminal offence of reckless mismanagement of a bank, which, controversially, contains a reverse burden of proof whereby senior managers are presumed guilty in the event of a bank failure and must prove their innocence.
If this regime had been in place at the time, HBOS might not have collapsed as managers would have been deterred.
And that is not all. The FCA’s much-delayed report on the failure of HBOS is due out later this year.
These are the aftershocks but Perman delves into how the bank plummeted during the decade before its near-collapse.
Bank of Scotland was brought to its knees by misguided mergers and rapid expansion across divisions. It was a veritable Russian doll of brands thrown together with no discernible long-term plan except empire building and short-term profits.
Ex-building societies Halifax and Birmingham Midshires as well as The Mortgage Business, Intelligent Finance and part of Sainsbury’s Bank were all absorbed.
The bank mimicked its old Scottish rival, RBS, with its reckless expansion into a national financial superpower. Brokers will recall the flamboyant leaders of HBOS throwing lavish parties and gunning to be the largest lender.
There was so much competition that banks dished out impossibly cheap mortgages with HBOS at the forefront. Its mortgage business model was built on volume: selling billions of pounds-worth of mortgages at wafer-thin margins and even loss leaders.
The bank’s commercial division also made huge losses, driven by reckless deals with businessmen. Former HBOS director Peter Cummings, who ran the corporate banking division, is one of the few senior figures from the banking crash to be singled out by the FCA. In 2012, he was fined £500,000 for his part in the bank’s downfall.
The HBOS story is one of mortgage frauds, incompetent management and auditors, and ignored whistleblowers. The disaster remains instructive: reams of regulation and culture change have been implemented to prevent such a collapse happening again. Policymakers and regulators alike would benefit from reading this book.