Monday, December 3, 2012

Former HBOS chief executive shows why banks need to provide ultra transparency

Reuters reports that the former chief executive of HBOS, a failed UK bank, said in written testimony to Parliament that management underestimated the risk being taken and the bank's board was swamped with information that made it difficult to spot risks.

Regular readers know that requiring banks to provide ultra transparency allows the market to independently assess the risk of and spot the risk in the banks.

With ultra transparency, even if the management and board directors of HBOS were incapable of assessing its risks, the market could do the assessment.  Please remember that included in the market who could perform an independent assessment of HBOS were its competitors.  Firms like Standard Chartered and HSBC.

With this assessment, market participants could have gotten out of the way when it became clear that the management and board of directors of HBOS did not know what they were doing and how much risk they were taking.

The former bosses of bailed-out British bank HBOS said on Monday management had underestimated the extent of the risks the group faced before it nearly collapsed during the financial crisis. 
HBOS, now owned by Lloyds (LLOY.L: Quote,ProfileResearch), was Britain's biggest home loan provider but its downfall was blamed on the aggressive growth of its corporate lending division. The bank was also heavily reliant on wholesale funding which dried up suddenly when financial markets froze during the crisis. 
James Crosby, who was chief executive between 2001 and 2005, said there were gaps in information given to management in the years leading up to the crisis in 2008 and some of the risks were underestimated. 
"With the benefit of hindsight it seems that, not withstanding improvements made after I departed, it was deficient in a number of ways," Crosby said in written evidence ahead of a parliamentary hearing later on Monday. He highlighted particularly the "quantification and stress testing" of corporate risks. 
Former Chief Executive Andy Hornby, CEO from August 2006 until the bank was bought by Lloyds (LLOY.L: QuoteProfileResearch) in early 2009 after a government bailout, said HBOS's corporate division had too much concentration in commercial real estate. 
In his written evidence before the hearing, he said it was clear that HBOS's concentration of commercial property loans - including big loans to single borrowers, concentration in higher risk exposures and highly leveraged deals - meant the corporate division "was vulnerable to a major downturn".....

He also said the bank's board was swamped by information from each division which made it difficult to spot risks. The problem was a surplus of information rather than a lack of detail. 
"The sheer volume of information supplied by every division right across operational risk, credit risk and regulatory risk may at times have made it harder for the board to fully understand the potential issues facing the business," Hornby said.

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