From the

62. The disparity between the amount HBOS lent to its customers and the amount it held in customer deposits was further highlighted by HBOS’s loan-to-deposit ratio, which increased from 143% at the time of the merger to 170% at the end of 2007. While this was below the Bank of Scotland level of 194% immediately before the merger, it was well above the ratios of HBOS’s clearing bank competitors and at the top of the range for UK mortgage banks, with the exception of Northern Rock which failed. By the end of 2008, HBOS’s loan-to-deposit ratio had reached 192%.

155. Further, with household savings ratios declining in a number of countries, including the United Kingdom, banks also had to rely more heavily on wholesale borrowing to expand lending. Securitising packages of loans and selling them on to wholesale investors quickly became an important and cheaper way for banks to raise funds for new lending. It also created new dependencies, however, with securitising vehicles requiring liquidity commitments from their bank sponsors. Securitisations using master trusts also required the originator to be able to replenish or top up the asset pool, meaning the originator had to be capable of continued lending, while strengthening its obligations to the securitisation structure.

160. With a significant proportion of banks’ funding coming from other financial institutions; shadow banks in turn dependent on liquidity support from banks; high system leverage; and chains of interdependencies created by complex financial products; linkages between financial institutions inevitably grew. The opacity of the system also grew and thus the ability of individual institutions and regulators to identify and assess the build-up of risks declined. This increased the risk that problems or concerns in one part of the global financial system could be rapidly transmitted to another part of the system, and then transmitted on again, and again.

234. While the Group found it reasonably easy to grow its assets, it found it much more difficult to increase deposits. As a result, with the exception of a small pick-up in 2004, the Group’s self-funding ratio declined steadily from around 66% in 2001 to 56% in 2007 (Chart 2.22), while the customer funding gap almost trebled from £68 billion to £190 billion.