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The HBOS Report – It’s Finally Here

The Prudential Regulatory Authority and the Bank of England today published the report of the inquiry into the failure of HBOS Plc. Those who were investors in the company at the time, or who suffered as a consequence of the bail-out of the company via a merger with LloydsTSB, will not need to be told what happened and why. This report does not add a lot to the story as the defects in the management of the HBOS are now well known.

To quote from this report: “The Board failed to identify the extent to which HBOS was moving up the risk curve” and it notes how the collapse of Lehman Bros undermined its funding options and the “material outflows of customer deposits” resulted in an unexpected funding need of £12.5 billion a week later. The aggressive growth strategy, poor quality assets and reliance on wholesale funding come into criticism as expected.

Peter Cummings, who led the charge into high risk commercial property lending, was the only former executive to have been penalised and the report does question why no action was taken against CEO Andy Hornby and others for their adoption of a dangerous business strategy. Will they be tackled now? After 7 years it seems exceedingly unlikely.

Another culprit for the disaster is identified as the Financial Services Authority (FSA), for poor supervision and reactive management style, but as that is now conveniently defunct, that is surely a dead issue now.

In reality this report is much too late and should have been produced in months not years. Punishment of malefactors years later is no incentive for others to behave in future, and it seems highly unlikely that there will be any such actions anyway. Like pay incentives, effective ones are those that “pay out” in the short term. Disincentives such as punishment for poor behaviour need to be invoked promptly. Justice needs to be swift, and a report produced seven years later will just cause folks to yawn and dismiss it because they have other short term priorities to deal with in the financial world.

But if you want to read the post-mortem on this issue the report is available here: http://www.bankofengland.co.uk/pra/Pages/publications/hbos.aspx . But the corpus of evidence is quite dead.

Roger Lawson

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