It should be added that the Report on the failure of HBOS also mentions, in addition to risky funding, ill-judged (with hindsight) lending; which of course is another reason why a bank can fail.In his foreword to the Report Andrew Bailey, who is a Deputy Governor of the Bank of England, writes:
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Both the strategy and operation of HBOS, and its supervision by the FSA, were creatures of the time. The FCA/PRA Report sets out, against the backdrop of almost uninterrupted economic growth over a long period and the rapid development of financial markets, the story of an institution that became unsustainable through its poor risk management, in respect of the credit risk on the assets side of its balance sheet, and on the liabilities side in respect of the vulnerability of its funding. These are, of course, the fundamental building blocks of banking (emphasis added)
Note his taking for granted that banks need funding to make loans as one of "the fundamental building blocks of banking". No nonsense here about banks being able to lend without funding by creating the money to lend out of thin air.The Report itself has something to say on economic conditions of the time:
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Halifax and Bank of Scotland merged [in 2001]during a period of heightened corporate activity, in the middle of an economic cycle that had begun in the early 1990s. UK domestic economic growth had been relatively steady since the recession of the early 1990s, resulting in an extraordinarily long period (around 60 quarters) of continuous expansion. The growth in the financial services sector was more than twice as fast as the economy as a whole, averaging 6% per annum in the decade preceding the crisis, and increasing its share of nominal gross domestic product (GDP) to around 10%. Confidence in the future prospects of the economy was reflected in both bank and non-bank equity prices, which rose steadily from the start of 2003 until 2007. As the benign conditions persisted for longer and longer, many perceived that a new paradigm of economic stability had been established.(emphasis added)
One of the "many" who (mis)perceived this of course was Gordon Brown, the Chancellor of the Exchequer until 2007 and Prime Minister when HBOS failed in October 2008 and now a discredited and broken man. Like him, those in charge of HBOS assumed that the boom/bust cycle had been broken and that the "new economic paradigm" would continue indefinitely and accordingly pursued a policy of expanding their lending and finding funding for this. Andrew Bailey says that
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The criticism in the Report is not that management failed to predict that there would be a global financial crisis.
and then goes on to make such a criticism with a different form of words:
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Rather, they should have put in place strategies that could in combination accommodate and respond to, in a timely way, changes in external circumstances.
As if the global financial crisis was not a change in external circumstances.The HBOS management was doing what managers of capitalist firms are supposed to do: trying to maximise profits. They aimed quite high. According to the Report, their stategy included
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a return on equity goal of around 20%.
In fact they lost everything for the bank. They do seem to have taken too many risks but isn't risk-taking what apologists claim is a justification for profit?
