At what point does a “high-risk” strategy become a matter of Corporate Governance?:: FSA on HBoS “very serious misconduct”

…perhaps a more pertinent question is: “how many sets of rules are there?”

The FSA has censured Bank of Scotland after finding it guilty of “very serious misconduct” which led to it being bailed out by the Government and taken over by Lloyds Banking Group.

The regulator says a fine in this case would be “both merited and substantial” but has decided against imposing a financial penalty as it says the taxpayer has already bailed out the bank once through the Lloyds takeover of Halifax Bank of Scotland in January 2009.

The FSA says a fine would just force the taxpayer to pay twice for the same misconduct.

The censure is against the conduct of Bank of Scotland’s corporate division between January 2006 and December 2008.

The FSA says the corporate division pursued an “aggressive growth strategy” that focused on high-risk, sub-investment- grade lending.

Its portfolio was high-risk which posed significant risk to big borrowers. When market conditions started to deteriorate in 2007, the division pushed for a greater market share as other lenders started to pull out of the market.

At the start of 2006, 52 per cent, or Pounds 44.4bn, of the corporate division’s loan-book was exposed to the commercial property market. By the end of 2008, this had grown to 56 per cent or Pounds 68.1bn.

Over this period, Bank of Scotland made repeated statements in its internal business plans that the bank was adopting a “selective and cautious approach to lending”.

In February 2009, Lloyds announced that the level of impairments on Bank of Scotland’s lending portfolio had been increased from Pounds 3.3bn to about Pounds 7bn.

The FSA says there was a lack of focus on managing risk across the portfolio and serious weaknesses in identifying transactions which showed signs of stress. It says other enforcement proceedings against HBOS are ongoing. A public interest report into the causes of HBOS’s failure will be published once these proceedings have concluded.

FSA censures BoS for high-risk strategy

I think that, by now, we all know that there are at least two sets and that, when it comes to the upper echelons in Banking, there is virtual immunity from prosecution, even individual or collective “blame”. Except it is OK to blame “the market” and spout drivel about the complexity of products, processes, regulations and legislation like they are each, in some way, detached from the activities or strategies of individual firms.

WRONG! Firms, such as HBOS, RBS, HSBC, Barclays, etc. are (were!) major players in “the market”. They, along with their US-based counterparts shaped, not only, the market but (courtesy of relentless lobbying and “friends” in high places) the regulations governing their activities and so much more.

“The market” is not, as it is regularly presented, an exogenous or alien entity. A more realistic perspective is of Banks, other FS firms, major Corporations, Institutional and Sovereign investors, etc. being SIGNIFICANT ENDOGENOUS COMPONENTS OF the market. Big and powerful enough to “make” the market; sufficiently smart to avoid major losses; BUT with an implicit (perhaps explicit, courtesy of the complicit!!?) assurance that they were, collectively, TBTF and individually reassured that either/both Office and accumulated wealth were as safe as they ever could be.

What a fantastic environment for “moral hazard” to thrive and spread making it easier to remove any healthy cells…the most high profile being Paul Moore…and to spread a new hybrid culture, like a bacteria, infecting customers (large and small) with an addiction to a, highly toxic, highly leveraged, high growth business model. A fully licensed (adapted) strain of a Ponzi scheme.

Although I seriously doubt that is what the report will say! After all the FSA report into activities at RBS – that may never have been undertaken had it not been for public “outcry” – wasn’t too far removed from a white wash worthy of a Metropolitan Police investigation into matters that are rather too close to upsetting cosy &/or lucrative, longstanding, relationships.  

Still, at least we know that everything has changed, the “guilty” have been punished and that it couldn’t ever happen again…or could it?

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