The parliamentary commission on banking standards says HBOS’ focus on the growth of its specialist mortgage lending saw it make “significantly” higher losses than rivals.
In its report, An accident waiting to happen: The failure of HBOS, published today, MPs say the growth in mortgage lending also led to the bank being “excessively confident” and taking greater risks in other areas such as structured investments.
HBOS was forced to merge with Lloyds Banking Group in 2008 to avoid collapse and the Government then took a 42 per cent stake in the merged bank.
The report states: “The [retail] division incurred substantially higher mortgage-related losses than its major competitors, reflecting the bank’s strategy of pursuing growth in higher risk non-standard mortgages.
“We also note that the division’s customer funding gap was a major factor in the group’s overall funding gap, which was a principal immediate cause in the short term of the failure of the bank. Prudent customer funding should have been a secure source of stability during market storms.”
HBOS was split into a number of brands including BM solutions for buy-to-let lending and higher risk mortgages and The Mortgage Business for specialist lending while Halifax was a purely mainstream lender.
MPs also hit out at the “poor quality” of HBOS assets with more than half of all impairments in safe residential mortgages, which is normally substantially lower than other assets.
John Charcol senior technical manager Ray Boulger says: “HBOS was heavily dependent on wholesale funding just like Northern Rock and Bradford & Bingley. The fact it grew so quickly meant they had to move into non-standard products”
Boulger says many of HBOS’ problems stem from selling loss leading tracker products and sub-prime deals that were too cheap.
PCBS member and Tory MP Mark Garnier says: “HBOS was going out and aggressively trying to grab market share and be a fast-growing business. They were creating the big problem of borrowing short and lending long and anyone who does that to a great extent will find themselves in trouble.”