5th April 2013
The Parliamentary Commission on Banking Standards says that the Government and regulators should consider banning the top three former HBoS executives – Lord Stevenson, Sir James Crosby and Andy Horby as the Telegraph reports this morning.
This is one of the key quotes – “The primary responsibility for the downfall of HBoS should rest with Sir James Crosby, architect of the strategy that set the course for disaster, with Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the bank’s board from its birth to its death.”
The BBC’s business editor Robert Peston is on top form when he suggests that the ‘catharsis’ which would come from a ban on top bankers such as those at the helm of HBoS would have been better coming much earlier in the crisis.
That is an extremely valid point. For those who have a continuing investment – now in the shares of Lloyds Banking Group – or who would like to be able to invest with confidence in mainstream British banks – a ban would provide fleeting satisfaction. There are much bigger issues.
Arguably, today’s banking commission still leaves three big systemic questions outstanding.
Within the UK, HBoS was easily the dominant bank in mortgages. This covered everything from mainstream lending usually through Halifax, through to large mortgages and business mortgages from Bank of Scotland, and on to sub-prime and buy-to-let mortgages through Birmingham Midshires.
Collectively HBoS was easily north of 30 per cent mortgage market share at times to the extent that rivals would periodically raise the possibility of a competition inquiry.
Clearly the Commission believes that a key failing was the willingness of the Bank to lend recklessly through its commercial lending function and to jurisdictions such as Australia and Ireland, mostly to firms in some way connected to property. The new merged group Lloyds Banking has suffered impairments of around £30bn on loans of up to £50bn.
Ireland’s property market has collapsed. But Australia with a property market underpinned by a commodity boom? There may be more to be discovered there.
How much of the collapse is due to HBoS’s leading position in the UK mortgage market boom of the 2000s?
So far so shocking but here is a hypothetical and yet important question.
What if commercial lending and lending overseas had been reined in and carried out more prudently? Without those international loans would the bank’s UK mortgage lending plus a reliance on wholesale funding still have broken the institution?
There are passages of the report focussing on this issue quoted here. “The [retail] division incurred substantially higher mortgage-related losses than its major competitors, reflecting the bank’s strategy of pursuing growth in higher risk non-standard mortgages.
“We also note that the division’s customer funding gap was a major factor in the group’s overall funding gap, which was a principal immediate cause in the short term of the failure of the bank. Prudent customer funding should have been a secure source of stability during market storms.”
But was it enough to break the bank without those other obviously crucial losses?
To put it another way, can banks such as HBoS safely ride a mortgage boom in their domestic market? At a time, when the Chancellor George Osborne is striving to get people to borrow at much higher loans to value, just how risky is this for the borrowers concerned and for the banks that make the loans. It is not clear that question has been answered.
The second question is about competition in banking.
Is it wise to seek to create another giant rival to the big retail banks and does it really benefit competition?
As the Commission says, HBoS was seen as the new force in banking following on from the merger of Halifax and HBoS in 2001. But no one in a position of influence and certainly not Prime Minister Tony Blair nor the Chancellor Gordon Brown did anything but give a hearty welcome to this new ‘big five’ player. The received wisdom – always a dangerous thing – was that it brought huge benefits to the competitive banking landscape. In such a climate, it was thought to be perfectly natural to allow Sir James Crosby to take up a role as Deputy Chairman of the Financial Services Authority.
That presumably gave HBoS some cover for its recklessness and that leads us back not just to the regulator – the very recently defunct FSA – but also to the Government of the time. Should we really be hoping that another bank – say for example the Co-operative with its big branch branch takeover – comes to be another challenger to the big five. Is it different this time because Co-op is better led or would we rather have a number of strong medium sized players to vie with the big boys for market share?
Should we revive the mutual sector and should we ever have lost it in the first place?
The whole sorry HBoS story might even lend itself (excuse the expression) to attempting to re-grow a mutual sector. The majority of the banks that broke themselves – HBoS included – had converted building societies at their heart. Maybe the whole idea of allowing building societies to demutualise or at least fall prey to carpetbagging plumbers and the like out to make a quick few hundred quid was unwise in the first place. A couple of national newspapers couldn’t give the conversion campaigns enough support. A mutual Bradford & Bingley, Halifax, Northern Rock and Alliance & Leicester might still be in existence and not filling up the books of the bad bank UK Financial Investments with toxic loans. The demutualisation process really got up a head of steam under John Major, but the Blair government hesitated for years before finally making it more difficult to force a demutualisation.
Two final points
It is obvious now that senior bankers shouldn’t be recruited from the supermarket sector. But what of the fact that Sir James Crosby came from the insurance sector. Was that really the best place to seek out ‘talent’. While we are not saying Sir James was involved in this personally, perhaps, given the track record of the insurance sector of that era with endowments and pension misselling, it wasn’t the correct place to find a chief executive for a the “new force in banking”. The insurance sector is much improved these days so it may not apply now. But to turn the question on its head, you wouldn’t want someone from the era of the banking boom and subsequent collapse to be taking the helm at listed insurers such as Aviva or Standard Life these days.
In conclusion, the report is valuable in that it gets to the core of what went wrong with the institution at the very centre of the British chapter of the financial crisis. But if all that comes out of this is another round of calls for bankers to banned from financial services, or executives to lose their knighthoods, then we think that not learn enough lessons have been learned and not enough important questions answered.