Hubris: How HBOS Wrecked the Best Bank in Britain (2 page)

In more tranquil economic times of course a bank, like any other business, can be allowed to fail. It happened with Barings and BCCI in the 1990s. And we must get to a situation where those who
gain from a profitable bank share the losses when it goes wrong. But this will take time. So regulation needs to be tightened up, it must be more intrusive and there has to be far greater
international co-operation between regulators.

As I write this, in the summer of 2012, the banking crisis is far from over. In the US and in the UK we cleaned out the banking system in 2008 when the crisis struck. Different mechanisms were
used, but the bad debts and the toxic assets were identified and dealt with. More capital was put into the banks, and in the case of the UK, the government acquired major shareholdings in RBS and
the Lloyds group.

In Ireland too, the government removed these bad assets from their banks. But there was a terrible cost as the banks were far bigger than the Irish state. When the bank debts became
Ireland’s debts, the country was brought to its knees. There is an important point here. In the future, people will look very closely at who stands behind financial institutions. To put it
bluntly, does that country have enough money to bail out any bank that needs it? Banks that grow too big for the country they are based in pose a serious threat. In the last decade the Scottish
National Party used to boast of an ‘arc of prosperity’, including Iceland and Ireland. They wanted Scotland to be part of it. We don’t hear much talk of that now.

Unless and until the eurozone ensures its banks are cleaned up we will not get economic recovery. Spanish banks are exposed hugely to a collapsed property market. In turn the problems in Greece
and Italy run the risk of defaults that could hit larger French and German banks. The inter-connections are still there and could still prove fatal.

The story of HBOS is salutary. Surely it is a classic case of trying to fly too close to the sun. The bank took on risks it did not understand and failed to make provision for. The result is
that the name may exist but it is not the bank it was. A walk around the former headquarters on the Mound is a depressing experience. The building is more museum than the beating heart of the
self-confident and prosperous bank it once was.

Alistair Darling

25 June 2012

In the autumn of 2008 I attended a black tie business dinner. I forget the occasion or the organisation responsible, they are all very similar and after a while the memories of
each merge into one. Next to me at the table was a man with whom I had little in common. He managed a commercial real estate company and, although he took a keen interest in the collapse of the
property market then in free fall, it did not directly affect him. His portfolio was mature with established tenants paying good rents. I only half listened to his conversation, nodding and smiling
occasionally so as not to appear too rude. Then he said something which seized my attention: ‘I withdrew £20 million today from Bank of Scotland to put it in a safe place.’

There had been rumours for days swirling around HBOS, the unlovely conglomerate which now owned the Bank. (‘The Bank’, with an initial capital letter, might mean the Bank of England
south of the border, but north of Berwick and Carlisle it had always meant Bank of Scotland). It was clearly in trouble, but the thought that it might go down, taking its depositors’ money
with it had never occurred to me and came as a real shock. The Bank had been part of the Scottish landscape for more than 300 years, as solid and as tangible as the rock on which Edinburgh Castle
stood. My wife and I had entrusted our savings to it. My sons had been Bank of Scotland customers since we opened Super Squirrel saver accounts for them as toddlers. The Bank had supported my own
company – and countless other new start businesses – through thick and thin and when I sold it, that’s where I deposited the proceeds.

Now it was also banker to another small business I chaired. We had not been in business as long as my dinner companion and we did not have £20 million, but we had a substantial sum on
deposit, hard-earned money which was keeping us safe through the recession. Britain had already seen the first run on a bank for 70 years. Unsettling television pictures of queues of savers waiting
to withdraw their cash had spooked ministers and helped to hasten the end of Northern Rock. I had no wish to do even a small part in pushing Bank of Scotland down the same path, but our company
could not afford to lose that money, nor see it tied up in administration or liquidation proceedings for months or even years. I called my company’s chief executive the following morning and
told him to open an account in a safer bank and transfer the money immediately. When I called him later in the day his news was not encouraging. It had taken him hours to get through on the
telephone and when he did it was to be told that because of the volume of new accounts being opened, it could be days or even a week before our application was considered. The rush away from the
Bank was headlong.

What happened to HBOS in the weeks following is part of this story, but only part. The excesses of bankers during the first decade of the twenty-first century are lurid enough to grip the
interest of readers, but to dwell too long on them would be to lose sight of what we have lost. The Bank of Scotland which all but disappeared with the collapse of HBOS was not the same Bank that I
and many of its customers knew in the last few decades of the last century – and bears no resemblance to the institution behind the Bank of Scotland name which is still over the frontage of
hundreds of bank branches – merely another brand of the massive Lloyds Banking Group.

The Bank whose story I want to tell was quantitatively different to banks operating now. It was not insubstantial, it was after all a FTSE 100 company – one of the biggest companies on the
stock market. But it was a fraction of the size of banks today and operated on a human scale. Customers could telephone branches and speak to people whose names they knew and faces they recognised.
If you called back, you could speak to the same person. For Bank of Scotland managers ‘know your customer’ did not mean look at a computer screen, but recognise their names, remember
their banking history, their businesses and perhaps their families too. A human scale meant that the chief executive could review all large lending propositions and all customer complaints,
replying to them personally if he felt they had not been adequately answered.

This was a bank which never called you at dinner time to try to sell you ‘products’. Thirty years ago when I began my relationship with it, the Bank took the view that if you needed
its services you would ask. Later its managers were encouraged to try to sell to customers, but it was never pushy and sometimes they looked rather embarrassed in doing so. It seems incredible to
me to write this now, but it was a bank which was trusted by its customers. When it adopted the advertising slogan ‘A Friend for Life’ it was not greeted with cynicism. People believed
it meant it, and more importantly, it did.

To say the Bank was rooted in the community is an understatement. It had been part of Scottish history since before the Act of Union and there was no major historical event since in which it had
not played a part. It acted as banker to a large proportion of the country’s employers and their employees. It banked charities and community groups, golf clubs and trade unions. It looked
after the millions of some of Scotland’s richest men and women, but was also one of the first banks in the UK to offer bank accounts for all in disadvantaged communities. When
The Big
Issue
wanted to open accounts for its homeless magazine sellers to deposit the cash they collected, the Bank’s Treasurer defied the money-laundering regulation which said that a bank had
to verify the home address of all its customers and opened them all with the address of one of the Bank’s branches.

Don’t get the impression that this was some hick bank. It was one of the most innovative in the world, the first to bring electronic banking to Britain, a leader in leveraged finance back
in the days when those were not dirty words, the first clearing bank to get its cost/income ratio below 50 per cent and a pioneer in getting others to sell its services so that it could extend its
reach further than bricks and mortar would allow. It was at the same time a risk taker, known for backing entrepreneurs, and a prudent institution, maintaining high capital ratios. And it became
the best-performing bank in Britain in terms of its return on equity. Its share price quadrupled in ten years.

Bank of Scotland was not unique. Many of its characteristics were shared by the other Scottish banks, The Royal Bank of Scotland and Clydesdale Bank, and they had once been replicated across the
UK. But with the exception of Yorkshire, which kept its bank longer than most, other regions lost their financial institutions to a relentless process of consolidation during the twentieth century,
which shrank competition and extinguished local responsiveness.

Bank managers used to be among the most respected in their communities – and they were in the community because managers managed branches and branches were part of the fabric of small
towns or city neighbourhoods. With the local clergyman and the school teacher, the bank manager was trusted to sign the back of your passport photograph or give you a character reference when you
went for your first job. A retired manager writing in the Bank of Scotland staff magazine noted how ‘Bank men’ usually ended up as the treasurer of the golf club, the church committee
or the parent-teacher association. I suspect that was once true of all bank managers anywhere in the UK – people knew the cash was safe with them. Part of the branch manager’s standing
came because he (almost invariably ‘he’) could make real decisions. He could agree a personal loan or business overdraft and he made his decision not only on the basis of working out
the figures, but also on his assessment of character based on years of local knowledge. Only in the case of large amounts would he need to get sanction from Head Office, which took into account his
recommendation and the fact that since he was likely to be in post for years at a time, he would have to live with the consequences if the decision turned out to be the wrong one.

Now many thousands of branches across Britain have been closed and those that are left are manned by ‘relationship managers’, who probably do not live locally, do not have time after
the stress of work to be treasurer of anything and will not be in post long enough to build a relationship with anyone or any business. Face-to-face meetings have given way to call centres, risk
assessment to credit scoring. Personal recommendation has been replaced by ‘customer acquisition’, services replaced by ‘products’ sold to reach targets, rather than to
answer the needs of customers. As recent fines imposed on the big banks by the regulator have shown, some products were ‘toxic’ – they did the customers who bought them more harm
than good – and in some cases the banks knew this before they sold them. To meet constantly rising profit expectations, big banks have continually to drive down cost – mostly at the
expense of customer service and satisfaction – and expand their sales, often by swallowing other companies to gain their customers. At each stage banks became more remote from their
customers, geographically and by hiding behind automated telephone systems. What has been lost in this process is trust.

This is the story of how one bank went from being one of the most trusted, to one from which customers could not wait to remove their money.

I am grateful to all those current and past executives of Bank of Scotland and HBOS who have spoken to me. Many asked for anonimity, so I feel it invidious to name those who did not. Where I
have attributed quotes to individuals, their words were already on the record, either in newspapers and magazines or company or Government reports. There were also many who would not speak to me.
As I say later in this story, I do not criticise them for that; I have no right to demand their response, but it does mean that I have not been able to check facts with them. I am grateful to those
who considered my request for an interview and then wrote to decline. Several did not give me the courtesy of a response.

I have tried to report only actions and not to attribute motives without evidence. I have also tried not to apportion blame. Readers should make up their own minds.

In the summer of 2012 a new scandal engulfed British banking. The collapses and rescues of 2008–9 had precipitated the deepest economic downturn for eighty years; banks
were still having to pay billions of pounds in compensation for mis-selling Payment Protection Insurance; and there was public outrage over continuing high levels of salaries and bonuses. The
revelation that LIBOR interest rates were being manipulated was the last straw. Regulators on both sides of the Atlantic imposed fines running into hundreds of millions of dollars and pounds on
several banks and there was a clamour in the UK for a judge-led public inquiry into the whole industry.

The Government’s response in establishing a Parliamentary Commission on Banking Standards was seen by some critics as a craven second-best. In the event the commission proved to be
anything but a creature of either the still-powerful banking lobby or the Government. It was led by the Conservative MP Andrew Tyrie, chair of the Treasury Select Committee, and recruited its
members from both houses of parliament. Drawn from all parties and none, they included political heavyweights like former Chancellor Lord Nigel Lawson and the former Treasury Committee chair Lord
John McFall. There was also the former Cabinet Secretary Lord Andrew Turnbull and, to the surprise of many, Justin Welby, once an oil trader, then Bishop of Durham and soon to be announced as the
next Archbishop of Canterbury.

The commission had powers to summon witnesses, obtain from the banks and the Financial Services Authority (FSA) papers which otherwise would have remained secret. It broke new ground in engaging
counsel to question witnesses. It worked quickly and showed its independence with its first report, which went considerably further than Government policy in calling for the
separation of domestic
and investment banking. Significantly, it launched an inquiry into the collapse of HBOS, forcing directors and managers of the bank and the regulatory authority to give evidence in public.