Extended-form Case Study

Strategic risk management: the case of HBOS

Published on March 29, 2017   22 min

Other Talks in the Series: Hot Topics

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.
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."
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.

Strategic risk management: the case of HBOS

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