HBOS was 'an accident waiting to happen' — then it needed a £20.5bn rescue

HBOS was created in 2001 by the £30bn merger of Halifax and Bank of Scotland, and it grew aggressively by lending. By 2008 the gap between its loans and its deposits had reached about £213bn, meaning the bank was funding itself heavily through wholesale markets rather than customer deposits. Its regulator, the Financial Services Authority, flagged the danger repeatedly: as early as 2004 the bank's own board recorded the FSA describing HBOS as 'an accident waiting to happen', and in 2006 the FSA wrote that the group's growth strategy posed risks that had to be managed and mitigated.

The warnings did not change the strategy. In July 2008 HBOS raised £4bn in a rights issue, but existing shareholders took up only 8% of it, and half-year profits had fallen 72%. When wholesale funding markets seized in the autumn of 2008, the bank that had borrowed most was the most exposed. A run on its shares forced HBOS into the arms of Lloyds TSB in September 2008.

The cost surfaced afterwards. In February 2009 Lloyds Banking Group revealed £11bn of losses at HBOS, and the combined group needed a £20.5bn injection from UK taxpayers to keep it standing. A 2013 Parliamentary Commission on Banking Standards titled its report on HBOS 'An Accident Waiting to Happen' and called the bank's collapse a 'colossal failure' of management and board.

The £30bn of value created by the 2001 merger was wiped out within seven years. HBOS is the textbook case of a bank that heard its regulator name the risk and treated the warning as a capital charge to absorb rather than a strategy to change.