A new report from the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) gives fresh insight into the bank’s catastrophic demise.
Charting the bank’s highs and lows, from its launch in 2001 following a merger between Halifax and Royal Bank of Scotland through to its takeover by Lloyds TSB in 2008, the report identifies three areas of failure: poor management and governance and regulatory oversight.
While typical in composition, size and structure for a large UK bank, the report claims the HBOS Board failed to instil a culture in the firm that balanced risk and return appropriately, and lacked sufficient experience and knowledge of banking. Of the twelve non-executive directors (NEDS), just one had a banking background. This lack of experience and knowledge hindered the NEDs’ ability to “provide effective challenge to executive management”. Consequently, the Board gave insufficient time, attention, focus and priority to risk management.
The report also claims the FSA failed to appreciate the full extent of the risks HBOS was running and took insufficient steps to intervene before it was too late. Failing to devote adequate resources to the supervision of large systemically important firms is also cited as giving rise to “a risk assessment process that was too reactive with inadequate consideration of strategic and business model related risks”. Insufficient testing and challenge by the FSA also enabled the firms’ senior management decisions to go unchecked and unchallenged.
In Recommendations for Regulators, the report says that while it is not the regulators’ role to ensure that no bank fails, “where the risks to their objectives are high they have the statutory powers to intervene.” In the case of HBOS, such intervention could have resulted in the bank changing its flawed business model to one which met basic standards of banking and implemented effective risk management, making it less vulnerable to economic downturn. The report also recommends that senior managers take ownership of their regulatory responsibilities, and notify regulatory authorities where issues arise – not simply assume that risk management systems are adequate if regulators do not intervene.
Click here to view The PRA/FCA Review into the Failure of HBOS.