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0:00
Hello, my name is Pat McConnell,
an Honorary Fellow
at the Macquarie University
of Applied Finance Centre
in Sydney, Australia.
In this session, I'm going to talk about
the topics of strategic risk in general
and the collapse
of Halifax Bank of Scotland
or HBOS in particular.
0:16
On September 18th, 2008,
Halifax Bank of Scotland or HBOS
was purchased by Lloyds Bank
at the direction of the UK government.
It was the largest failure of a bank
in the UK to that point
and has cost the UK taxpayer
over 20 billion pounds so far.
But although the failure
was precipitated
by the global financial crisis,
it was not the root cause,
in fact,
HBOS had not made too many bad loans.
The root cause was a flawed strategy.
At the time, much of the blame
for the collapse of HBOS
was based on youthful and relatively
untested CEO, Andy Hornby,
a marketing whiz kid hired
from the giant retailer Asda.
However, the seeds of the collapse
had been sown well
before Mr. Hornby had been hired as CEO.
In 2004, the bank's regulator,
the Financial Services Authority
had warned that the bank
was "an accident waiting to happen."
1:06
In late 2015, the UK
Prudential Regulation Authority, PRA,
and the Financial Conduct Authority,
the FCA,
concluded that Halifax Bank of Scotland
had failed because
"The board placed inappropriate reliance
on continuous growth
without due regard to the risks involved
and the result was a flawed
and unbalanced strategy
and a business model
with inherent vulnerabilities."
But unfortunately, HBOS was not unique,
others came to grief
as a result of the flawed strategy
such as Lehman Brothers,
Anglo-Irish Royal Bank of Scotland,
Northern Rock and so on.
The failure of HBOS
raises some interesting questions.
How was the HBOS strategy flawed?
Why did no-one,
bankers, regulators, investors
pick up the implications
of this flawed strategy until too late?
And could it happen again?
These questions are especially worrying
because in 2004,
the board of HBOS
was warned by the regulator,
at that time
the Financial Services Authority
that their aggressive growth strategy
was an accident waiting to happen.
Bad strategies can be very dangerous
but also difficult to detect
because in practice most strategies
are actually little more
than vague aspirations
which cannot really be evaluated
by investors.
