The PRA and FCA have published a report containing a review into the failure of the HBOS Group.
The review concludes that ultimate responsibility for the failure of HBOS rested with the board and senior management.
Findings
The review states that the failure of HBOS can ultimately be explained by:
- the board failing to instil a culture within the firm that balanced risk and return appropriately, and lacked sufficient experience and knowledge of banking;
- executive management, unchallenged by the board or by control functions, pursuing rapid and uncontrolled growth of the group’s balance sheet (leading to an over-exposure to highly cyclical commercial real estate at the peak of the economic cycle, lower quality lending, sizeable exposures to entrepreneurs, increased leverage, and high and increasing reliance on wholesale funding);
- HBOS’ underlying balance sheet weaknesses making the group extremely vulnerable to market shocks and ultimately failure as the crisis of the financial system intensified;
- an extended period of inflows of capital to developed economies resulting in low yields, declining awareness of risk and asset price bubbles, all unconstrained by market discipline;
- an overall systemic crisis in which the banks in worse relative positions (such as HBOS) were extremely vulnerable to failure; and
- the FSA’s failure to appreciate the full extent of the risks HBOS was running and to intervene sufficiently.
The review notes that many of these failings have since been addressed by the recent changes in the regulatory landscape of the financial services sector in the UK.
Recommendations
In light of these findings, the review encourages boards to ensure that their business models are sustainable, to promote the principle of safety and soundness, and to include non-executives with a diversity of experience from inside and outside the banking sector. It also directs senior managers to take ownership of their regulatory responsibilities under the proposed senior managers regime and to encourage regulatory adherence.
The review urges regulators to be willing to intervene in business where necessary, to develop their ability to supervise international groups and to guard against the risks of actual or perceived conflicts of interest arising from the composition of the boards of such groups.
Copies of the
report; http://www.bankofengland.co.uk/pra/Documents/publications/reports/hbos.pdf
executive summary and recommendations;
opening remarks; http://www.bankofengland.co.uk/pra/Documents/publications/reports/hbossum.pdf
review of enforcement action by Andrew Green QC; and http://www.bankofengland.co.uk/pra/Documents/publications/reports/agreenreport.pdf
press release are available. http://www.bankofengland.co.uk/publications/Documents/news/2015/086.pdf
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