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By Stephen McPhie, CA
Partner
RSD Solutions
Andrew Bailey of the Bank of England and designated deputy of the new UK Prudential Regulation Authority, which will supervise banks, has made some scathing comments in the Herald newspaper [1] about how RBS and HBOS were managed in the years leading up to their massive government rescues that required tens of billions of pounds of taxpayer funds.
His comments are extensive but summed up by his comment: “… people who ran those two institutions just lost sight of what I would call sound principles of banking.”
I was working in the investment banking sphere in the City of London in the early 2000’s and observed RBS in the wake of its acquisition of NatWest in early 2000. At the time, the acquisition and integration was arguably the best executed and most successful of any large bank merger worldwide. However, the bank then appeared to aggressively pursue a strategy of buying market share. I saw it commit large amounts to many syndicated leveraged transactions for inadequate remuneration in terms of the risk. Some borderline loans led by other banks only succeeded because of this.
Fred Goodwin, the aggressive head of RBS, seemed to want to make his institution the largest bank in the world and he almost succeeded before the pile of cards came crashing down. From 2001 to 2007, RBS’s assets doubled, mainly through a string of acquisitions. This culminated in the disastrous acquisition of ABN Amro, a complete basket case at the time. Shortly thereafter, RBS required a government rescue.
In my time in the City, I wondered what RBS’s balance sheet would look like if there were a recession. Many people attributed RBS’s downfall to the ABN acquisition. This may have been the straw that broke the camel’s back, but it seems that RBS’s balance sheet had been weakening significantly beforehand. It seems that Andrew Bailey agrees. He said, talking about the pre-ABN era: “I think there was very rapid expansion of the investment bank. I think the controls around the expansion of that investment banking activity were clearly not adequate.”
At the same time, Andy Hornby was running HBOS – at least he was supposed to be. He had been a great success at ASDA (Wal Mart’s UK subsidiary) in running the clothing retail business. He seemed to take the large volume, low margin mentality into the property lending business at HBOS with disastrous consequences. (HBOS was easily Britain’s largest mortgage lender and also had very large exposures to property developers.) Many people blame Peter Cummings, the head of the corporate bank, as being the main culprit for the debacle but it is questionable whether or not his boss had any ability to exercise any sort of oversight on his activities.
At HBOS in 2005, Paul Moore, HBOS’s Head of Regulatory Risk, warned that the bank was becoming too risky. Shortly after that he was forced out of the bank and was replaced by someone he claims had a sales background.
In the cases of both RBS and HBOS, effective and prudent risk management seemed to go by the wayside in the interests of growth and, perhaps, feeding giant egos. In fact, never mind sophisticated risk management set ups, simple common sense seemed to be absent. (The applicability of the term common sense to the Financial Services Authority at this time is another topic.)
Interestingly, Andy Hornby has returned to his retail roots as Chief Executive of Alliance Boots, Britain’s largest drug store chain.
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