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Practice paper

Reckless endangerment: The failure of HBOS

Patrick Mcconnell
Journal of Risk Management in Financial Institutions, 7 (2), 202-215 (2014)
https://doi.org/10.69554/MLKD1571

Abstract

In 2004, UK banking regulators reportedly told the Board of Halifax/Bank of Scotland (HBOS) that their chosen growth strategy was an ‘accident waiting to happen’3. Just four years later, the accident happened and HBOS collapsed under a mountain of debt, requiring the injection of some £20bn of taxpayers' support. The UK parliamentary inquiry into the HBOS collapse labelled the bank's strategy ‘incompetent and reckless’. This paper looks at the failure of HBOS using a behavioural finance perspective, in particular considering the cognitive biases (such as over-confidence and groupthink) that may have led directors to underestimate the seriousness of the bank's situation. In its final report, the UK parliamentary inquiry into banking standards recommended that a new criminal offence be created to cover reckless behaviour by senior bankers. The paper considers how such reckless behaviour might be detected and managed before (rather than after) it leads to bank failure.

Keywords: behavioural finance; Halifax Bank of Scotland; reckless behaviour; overconfidence; groupthink

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Author's Biography

Patrick Mcconnell is Visiting Fellow at Macquarie University Applied Finance Centre in Sydney, where he teaches courses in operational risk, systems risk and enterprise risk management.

Citation

Mcconnell, Patrick (2014, March 1). Reckless endangerment: The failure of HBOS. In the Journal of Risk Management in Financial Institutions, Volume 7, Issue 2. https://doi.org/10.69554/MLKD1571.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 7 / Issue 2
© Henry Stewart
Publications LLP

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