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15 Banking - a risky business

This unit looks at the circumstances which ted to the rescue of a major
UK bank by a rival bank, Lloyds TSB, and the UK taxpayer.

BEFORE YOU READ

Discuss these questions.

1 In terms of risk-taking, how would you expect a bank to act?
2 Do you know of any past banking failures, either in your own country or abroad?
If so, describe them briefly.

READING

Understanding the main points

Read the article on the opposite page and answer these questions.
1 Why were people surprised that Sir James Crosby left H BOS in 2006?
2 What happened to HBOS in 2008?
3 What was Paul Moore's position in the bank before he left in 2005?
4 What did Mr Moore say was wrong with H BOS's growth strategy?
Was the bank taking too many risks, or not enough in his opinion?
5 What type of company is H BOS compared to, in terms of its corporate strategy?
6 Who else was worried about the inadequate risk management at HBOS?
7 Which potential economic situation did they fear would expose the weaknesses
in H BOS's attitude to risk?

Understanding details
Read the article again and answer these questions.
1 Which position did Sirjames Crosby hold at HBOS until 2006?
2 Which position did Sirjames eventually take up after he left HBOS?
3 Which two banks merged in 2001 to form HBOS?
4 How did the main funding policy of the two banks differ, before they merged?
5 What had happened when Mr Moore had tried to highlight the dangers of the bank's
growth strategies in the past?
6 Which two business sectors did analysts feel that HBOS had lent too much money to?
7 What was their specific concern about the U K property market?

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 UNIT 15 BANKING -A RISKY BUSINESS

Evidence triggered Crosby's departure

an appointment made by the UK erly minuted by the Chief Financial
25 government treasury under Gordon Officer. I told them their sales culture
Brown. He said that under Sir James's was significantly out of balance with
leadership, HBOS was 'going too fast' 65 their systems and controls,' allegations
and was a 'serious risk to financial which HBOS denied.
stability'. H As far back as 2003, however, some
D The origins of the bank's aggressive analysts had expressed concerns that
approach to doing business can be HBOS was expanding too quickly and
found in the merger of Halifax and 70 taking on too much risk, particularly in
Bank of Scotland in 2001. The logic of financing various retail and real-estate
putting the two businesses together entrepreneurs. It added to the group's
35 was this: Bank of Scotland, which bet on UK property through private
relied on wholesale (borrowed) fund- equity-style deals to buy into builders,
by Jane Croft ing to finance at least half its lending, 75 hotels and restaurants as the market
could utilise Halifax's larger balance neared its peak.
A When Sir James Crosby, CEO, left sheet and retail deposits (made by I One analyst wrote in 2003, 'HBOS
Halifax Bank of Scotland (HBOS), one 40 savers) to increase corporate lending. has grown its [corporate] loan book
of the world's largest banks, in 2006, E HBOS adopted Bank of Scotland's significantly faster than other large
many were surprised that he had cho- aggressive funding model. Halifax, as so banks. As long as the economy is
5 sen to leave a top job in British banking a former building society, had been robust, HBOS has great revenue poten-
so young. The bank's shares had hit an around 80-per-cent funded by retail tial, but there are risks if we face a
all-time peak, and its financial results 45 deposits. But as the new entity grew, it slowdown.' In 2002 alone, HBOS lent
appeared to be excellent. relied more on wholesale funding than £5.5bn to commercial property — more
B Today, however, his exit from the retail deposits to finance growth. 85 than the entire loan exposure to com-
10 bank at only 50 years old looks more It grew very speedily on the back ofthe mercial property of rival Lloyds TSB.
like a fortunate piece of timing. After consumer lending boom in the J Although the crisis in wholesale
the 'credit crunch', which later devel- 50 early 2000s. markets hit all banks, HBOS's whole-
oped into a full-blown recession, F Sir James also hired Mr Hornby, a sale funding policy and exposure to
hit in 2008, HBOS was on the point of former supermarket executive, to 90 the UK property market left it more
15 of collapse. develop the retail bank, and HBOS vulnerable than other banks. Mr
C Paul Moore, Head of Regulatory became an aggressive competitor, Moore's claims provide some ideas as
Risk at HBOS between 2002 and 55 offering supermarket-style 'pile to why the bank came so close to col-
2005, made a statement to UK them high, sell them cheap' products, lapse in 2008.
Members of Parliament in mid-Febru- in line with their sales-driven business
20 ary 2009. This started the chain of culture.
events that ended in Sir James's resig- G Mr Moore said in evidence, 'I told
nation as Deputy Chairman of the 60 the board they should slow down, but
Financial Services Authority (FSA), was prevented from having this prop-

Understanding meaning
1 In paragraph 1, the author mentions that Sir James Crosby's departure from the head ofthe bank at such a young
age (50) now looks like a 'fortunate piece of timing'. What might she be implying by this phrase?
2 In paragraph G, when Paul Moore told the bank that their sales culture was 'significantly out of balance with
their systems and controls', which banking function was he referring to?
3 The article mentions that HBOS lent a lot of money to the property market: It added to the bet on UK property
(paragraph H). What type of activity does the word bet normally relate to? What does this suggest about the
bank's approach to business?
4 As long ago as 2003, a number of people expressed concerns about HBOS's business strategy. Find an
expression in paragraph I ofthe article which describes how HBOS was 'expanding too quickly'compared to
other banks.
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UNIT 15 -- BANKING-A RISKY BUSINESS

VOCABULARY

Definitions
Match these phrases from the article (1-6) with their meanings (a-f).
1 wholesale funding a) money which is lent to private individuals
2 retail deposits b) a (debt) method that banks use in addition to savers' deposits to
finance operations
3 consumer lending c) a financial institution which was originally formed to help people buy
or build houses with money which was saved with it
4 corporate lending d) the money that savers put into banks
5 building society e) the total amount of money a financial institution has lent to customers
6 loan exposure f'J money which is lent to companies

Vocabulary development
Without looking back at the article, tick ( / ) the statements which are found in it.
1 The bank's shares had hit an all-time peak. LJ
2 The bank's shares had hit an all-time low. •
3 Its financial results were disappointing. •
4 Its financial results appeared to be excellent.
5 HBOS shares bottomed out. i !

6 HBOS was on the point of collapse.

7 HBOS's share price doubled in a week.
8 It grew very speedily. U
9 HBOS was contracting too quickly.
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10 HBOS was expanding too quickly.

Definitions
Match these words and phrases from the article (1-8) with their meanings (a-h).
1 all-time peak a) a time when business activity increases rapidly

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2 credit crunch b) strong and stable
3 recession c) a reduction in the general availability of loans or credit or a sudden
tightening of the conditions required to obtain a loan from the banks
4 collapse d) a period when demand for products and services decreases
5 boom e) at risk, open to danger
6 robust (economy) f) the reduction of a country's gross domestic product (GDP),
usually for at least two quarters of a year
7 economic slowdown g) when something such as a share reaches its highest historical point,
price or value
8 vulnerable h) when a company, organisation or system suddenly fails or becomes too
weak to continue
 UNIT 15 BANKING - A RISKY BUSINESS

Sentence completion
Use words and phrases from Exercises A-C to complete these sentences.

1 In 2008, the UK experienced a .which meant that people found it more difficult to get a
loan from a bank.
2 In 2006, HBOS shares had an all-time By 2008, however, the picture was quite different.
The bank was on the of.
3 HBOS had adopted a very aggressive funding model which left it very when the
credit crunch hit.
4 The bank had relied too heavily on and not enough on deposits.
5 Added to that, the bank's sales-driven culture had resulted in the bank having an extremely
high It had lent far too much money to customers.
6 The economic was over and what was first believed to be a short credit crunch
had turned into a more serious

Understanding expressions
Choose the best explanation for each phrase from the article.
1 '... Sir James's resignation as Deputy Chairman ..." (lines 21-22)
a) when someone leaves their job voluntarily
b) when someone is fired by their employer
2 '... on the back of the consumer lending boom ...' (lines 48-49)
a) as a result of
b) after
3 '... "pile them high, sell them cheap" products ..." (lines 55-56)
a) a few products with a high profit margin
b) a lot of products with a low profit margin
4 '... from having this properly minuted...' (lines 61-62)
a) time spent on it
b) written down in the official notes of the meeting

OVER TO YOU

In banking, what are the pros and cons of having a very strict risk-management policy?
Think of different economic conditions, different forms of funding, different types of lending and the
part these can play in the success (or failure!) of a bank. Give a short presentation.
The disgrace of troubled UK banks extends further than this story. Several executives of troubled banks
were heavily criticised for trying to accept enormous financial payments, even after these institutions
had got into serious financial difficulty. Should an executive of a failed bank be allowed to carry on
taking so much money? How should such executives be dealt with? Discuss your ideas.
Do an online search to discover what has become of HBOS and its other senior executives since
this article was written. Give a short presentation.
Did a bank in your region suffer difficulties? If so, describe the events in a brief report.

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