Reckless endangerment

the failure of HBOS

Patrick McConnell

Research output: Contribution to journalArticle

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'. 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.
Original languageEnglish
Pages (from-to)202-215
Number of pages14
JournalJournal of risk management in financial institutions
Volume7
Issue number2
Publication statusPublished - 2014

Keywords

  • behavioural finance
  • Halifax Bank of Scotland
  • reckless behaviour
  • overconfidence
  • groupthink

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