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Reckless endangerment: The failure of HBOS

Author

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  • Mcconnell, Patrick

    (Senior Manager, Australia)

Abstract

In 2004, UK banking regulators reportedly told the Board of Halifax/Bank of Scotland (HBOS) that their chosen growth strategy was an ‘accident waiting to happen’3. Just four years later, the accident happened and HBOS collapsed under a mountain of debt, requiring the injection of some £20bn of taxpayers' support. The UK parliamentary inquiry into the HBOS collapse labelled the bank's strategy ‘incompetent and reckless’. This paper looks at the failure of HBOS using a behavioural finance perspective, in particular considering the cognitive biases (such as over-confidence and groupthink) that may have led directors to underestimate the seriousness of the bank's situation. In its final report, the UK parliamentary inquiry into banking standards recommended that a new criminal offence be created to cover reckless behaviour by senior bankers. The paper considers how such reckless behaviour might be detected and managed before (rather than after) it leads to bank failure.

Suggested Citation

  • Mcconnell, Patrick, 2014. "Reckless endangerment: The failure of HBOS," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 7(2), pages 202-215, March.
    • Handle: RePEc:aza:rmfi00:y:2014:v:7:i:2:p:202-215
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    More about this item

    Keywords

    behavioural finance; Halifax Bank of Scotland; reckless behaviour; overconfidence; groupthink;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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