XIII. Lessons from the UK Banks

Lessons from the UK

See for example the conclusions from the investigation of Barclays carried out by Anthony Salz, lawyer and investment banker for a £17m fee. He said in an interview with the FT that over the decade starting in 2000 at Barclays,


Their focus on short-term return on equity and their competitive position led to a vacuum in culture and values (FT Jenkins April 4 2013).


Barclays had to make a £2.6bn provision for mis-sold payment protection insurance and paid a 290m fine for its involvement in the Libor rate fixing scheme.


The total cost of the HBOS bailout in the UK was close to £30bn - of which £20bn was direct government support - according to a report published by the UK's the Parliamentary Commission on Banking Standards (see FT 2 April 2013).


The case of HBOS is instructive and resulted in the biggest bailout in the UK banking system. It was built on a flawed business model that has some parallels with Laiki and Bank of Cyprus.


This model was built on 'ill-judged lending, poor risk control and slack regulatory scrutiny' (FT Thompson and Jenkins 5 April 2013).


In the 2000s lending expanded aggressively based on a belief that HBOS possessed a special set of skills that its competitors lacked. Things came particularly unstuck in corporate lending in risky areas like construction and property resulting in bad loan 'impairments' (don't you love the language!) of at least £25bn. This was compounded by out-of-control lending in the bank's Australian and Irish operations resulting in further impairments of £14.5bn between 2008-11.


The last plank of the bank's disastrous business model - which differs considerably from the of the Cyprus banks with most of their funds in deposits - was supplied by the growing leverage of deposits to loans. This ratio rose from 143% to 198% between 2001 and 2008. The yawning gap was filled by short-term borrowing on wholesale money markets.


HBOS executive have explained the bank's failure in terms of the drying-up of wholesale funding but this was rejected by the Commission. It blamed the bank's collapse on a “flawed strategy, inappropriate culture and inadequate controls.” This included the poor quality of its loans, the weakness of its risk management, exacerbated by the federal structure of the bank which gave its divisions too much operational autonomy.


The defunct Financial Services Authority also comes in for blame for its “thoroughly inadequate” supervision.


The report points to the "excessive use of junior, box-ticking staff in overseeing the bank’s activities and condemns the 'appalling supervisory neglect of asset quality'”.


Andrew Tyrie, chairman of the parliamentary commission said,


‘The HBOS story is one of catastrophic failures of management, governance and regulatory oversight.’


In February 2008 the UK government in effect nationalised the bank, Northern Rock. The costs of the loans from the Bank of England (approximately £25 billion) and guarantees (approximately £30 billion) extended by the Bank of England and the value of the company's mortgage book (approximately £55 billion), with estimated to total around £100 billion, were added to the National Debt resulting in an increase to the National Debt from £537 billion, or 37.7% of GDP to around 45% of GDP. This was equivalent to £3,000 extra borrowing per family in the UK population. (Wikipedia: Nationalisation of Northern Rock).

To: Bank Bailout Conclusions