British lawmakers pushed for three former top executives at HBOS Plc to be banned from working in the financial industry after their “self-delusion” led the lender to require a 28 billion-pound ($42 billion) rescue.
Regulators should consider barring former Chairman Dennis Stevenson, 67, and ex-Chief Executive Officers James Crosby, 57, and Andy Hornby, 46, from the finance industry, a panel of lawmakers said in a report today. The Financial Services Authority was also criticized for inadequate oversight of HBOS.
Almost five years after the rescue, the committee singled out the three for embarking on an aggressive expansion strategy, “incompetent” lending and their failure to understand and manage the risks they were taking. By focusing on risky commercial real estate, leveraged loans and funding for entrepreneurs, HBOS ran up bigger loan losses than any U.K. counterpart, forcing it to be rescued, the panel said in a report that branded the company as a “manual for bad banking.”
“We are shocked and surprised that, even after the ship has run aground, so many of those who were on the bridge still seem so keen to congratulate themselves on their collective navigational skills,” the cross-party Parliamentary Commission on Banking Standards said in London. “An apology is due for the incompetent and reckless board strategy.”
So far, the only HBOS executive to be banned from the industry for life is Peter Cummings, who ran the corporate unit responsible for most of the bank’s losses. The lawmakers said today responsibility for HBOS’s downfall can’t be assigned to him alone after the FSA said it considered the chances of establishing personal culpability against other individuals to be very low. Cummings, 57, now a trustee of Ben View Resource Centre, a Scottish charity, wasn’t available to comment.
The lawmakers said primary responsibility for the bank’s demise lies with Crosby, CEO from HBOS’s creation out of the merger of Halifax Plc and Bank of Scotland Plc in 2001 until 2006, his successor Hornby, and Stevenson, who was chairman from the creation of the Edinburgh-based lender until its bailout.
Hornby declined to comment through David Stevens, a spokesman for Gala Coral, where he now runs the company’s Coral bookmaking unit. Crosby, who today stepped down as an adviser to private equity firm Bridgepoint Capital Ltd., didn’t immediately respond to a request for comment.
Crosby apologized to the panel at a December hearing, saying it would be “wrong” to disassociate himself from the bank’s collapse. Hornby told lawmakers that he “bitterly” regretted failing to foresee the seizure of the credit markets that led to HBOS’s demise.
Stevenson had told the committee that “mistakes were made” at HBOS. He had earlier been criticized by the panel’s chairman, Andrew Tyrie, for claiming he was a part-time non-executive chairman even after he told the regulator in 2008 he was executive chairman. Stevenson, who declined to comment, relinquished his position on the FSA’s register of people approved to work in the industry in 2012.
“Stevenson, in particular, has shown himself incapable of facing the realities of what placed the bank in jeopardy from that time until now,” the panel said today. “Simply allowing approved-persons status to lapse is insufficient.”
HBOS’s assets more than doubled to 681 billion pounds between 2001 and 2008 as the U.K.’s biggest mortgage provider stepped up lending to entrepreneurs and real-estate developers following the merger of Halifax and Bank of Scotland.
“The strategy created a new culture in the higher echelons of the bank,” the panel said. “This culture was brash, underpinned by a belief that the growing market share was due to a special set of skills which HBOS possessed and which its competitors lacked.”
HBOS’s board lacked the expertise to oversee the expansion and lending risk properly, the committee said. Executives argued the bank was “a conservative institution” when it wasn’t.
The panel said the FSA had failed to follow through on concerns that HBOS’s risk controls weren’t keeping pace with the rapid expansion. It blamed the Basel II capital requirements for giving regulators scope to allow banks to determine the risk carried by their assets.
Much of the supervision of the bank was done by junior FSA staff and without the engagement of senior managers, which led to “box ticking” that missed the bigger forces that would lead to the lender’s demise. The priorities of the FSA may even have led to reinforce the “misplaced priorities” of HBOS’s senior managers, the lawmakers said.
The Prudential Regulation Authority, one of the two bodies that this month replaced the FSA, said in a statement it will study the commission’s report to ensure lessons are “fully learned.” The Financial Conduct Authority, the other successor to the FSA, is preparing to publish the regulator’s report on HBOS “at a later date,” it said.
By 2011, HBOS’s corporate lending division had about 25 billion pounds of impaired loans. The international unit was left with 15 billion pounds of impaired loans, mostly from Australia and Ireland, the report said. The losses were down to “incompetent lending” rather than the financial crisis of 2008, the lawmakers said.
“This was a traditional bank failure pure and simple,” the committee said. “It was a case of a bank pursuing traditional banking activities and pursuing them badly.”
Lloyds Banking Group Plc, which agreed to buy HBOS in 2008, had to subsequently seek a 20 billion-pound bailout that gave the government a 43 percent stake. The London-based lender posted its third consecutive full-year loss in 2012.
“We continue to focus our efforts on rebuilding the group for the benefit of our customers, employees and shareholders,” Lloyds said in a statement.