The Parliamentary Commission on Banking Standards today issued its fourth report, which focused on the downfall of HBOS and the role of the three men most heavily involved in the Bank’s downfall.
Entitled “An Accident Waiting to Happen: the Failure of HBOS”, the fourth report looked closely at the background to HBOS’s near-collapse in October 2008 and the part played in that collapse by the former chairman Lord Stevenson and former chief executives Sir James Crosby and Andy Hornby.
The Parliamentary Commission on Banking Standards is appointed by both Houses of Parliament to consider and report on:
- professional standards and the culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process;
- lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy; and
- to make recommendations for legislative and other action.
Previous reports focussed on:-
- Banking standards (published on 21 December 2012)
- Banking reform and structure (published on 11 March 2013)
- Proprietary trading (published on 15 March 2013).
All of the commission’s reports can be found online here.
The Government’s Commission on Banking Standards, chaired by the Conservative MP, Andrew Tyrie, which also includes noteworthies such as Lord Lawson and Lord McFall, examined the roles played by former HBoS chairman Lord Stevenson and former chief executives Sir James Crosby and Andy Hornby, and its damning report today accuses them of presiding over a lending spree which led to the bank’s downfall at the height of the financial crisis in 2008.
It also singled out former chairman Lord Stevenson as being ‘incapable of facing up to the reality of what placed the bank in jeopardy’.
Like Northern Rock, HBoS – created in 2001 by a merger of Halifax and Bank of Scotland – teetered on the brink of collapse after relying on risky short-term loans from other banks to fuel its own lending to customers. When banks became too scared to lend to each other during the financial crisis in 2008, HBoS – saddled with £238billion of debt – had to be rescued by Lloyds.
All three men at the top of the company have moved on to lucrative positions since leaving HBoS, but the commission found their actions so ‘deluded’ it has called on the City watchdog to consider banning them from working in the financial sector ever again.
Perhaps the single most important question which flows from the Commission’s fourth report is whether and to what extent its recommendations will now be implemented. It would appear that there is a real reluctance on the part of the Government, to follow through on the Commission’s recommendations. In its second report, issued on 11th March 2013, the Commission followed the Vickers panel in calling for banks to hold 4% equity capital – yet the Chancellor appears strangely reluctant to follow the advice of the two committees he established.
So what is equity capital percentage and why is it important? It is another way of saying that banks should be forced to hold equity capital equivalent to 4% or more of the value of assets. Put another way, the leverage ratio should be 25 times. By contrast, the chancellor, George Osborne, is happy for UK banks to follow the Basel demand for just 3% equity, implying a leverage ratio of 33.
Measuring banks’ balance sheets is not easy, but leverage is probably the most important ingredient in the mix. For example, banking systems that emerged from the economic crisis relatively unscathed, such as Canada’s, had significantly lower leverage levels than those seen in either the US or the UK.
With George Osborne apparently reluctant to follow the advice of two committees that he established on bank leverage, it remains to be seen whether the report issued today into the downfall of HBOS and the roles played by Lord Stevenson and former chief executives Sir James Crosby and Andy Hornby, will likewise be side-stepped.
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