When banks are required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details, independent, experience bankers can look at this information, see if the banks are taking on excessive risk and bring market discipline on those banks who are taking on too much risk.
As reported by the Telegraph,
George Mitchell, chief executive of the bank’s corporate division until the start of 2006, said HBOS’s failure was caused by “aggressive growth” in 2006 and 2007 that left it loaded with bad debt.
As a result, it was more vulnerable than rivals when the panic struck in 2008 because the market knew its loans had been made at the peak of the boom.
Addressing the Parliamentary Commission on Banking Standards (PCBS), he said: “It was the rapid rate of loan growth, not just in corporate but the whole of HBOS, while others scaled back that spooked the market ... and led to HBOS being disproportionately impacted. Any bank that had grown at that speed in 2007 would have had the same difficulty.”...
Giving evidence to the PCBS, Mr Mitchell rejected the idea that HBOS was felled by a shortage of deposits – its notorious “funding gap”. He said the market lost confidence in the bank due to the high levels of risk on its books.Markets knew HBOS had risk from when they were making their loans, but without disclosure of the exposure details, the market had no way of telling how risky the loans were.
As a result, HBOS was particularly vulnerable to a loss of confidence.
“It was the aggressive growth not the quantum [of wholesale funding] that was the problem. When markets have lost confidence, the amount [of funding] you want becomes partially irrelevant... You won’t get it,” he said....Regular readers know that transparency is the foundation for confidence in the financial markets, particularly for banks.
With ultra transparency, market participants can do their own independent assessment of a bank like HBOS. Market participants have confidence in their own independent assessment and as a result they can have confidence in the amount and price of their exposure to a bank like HBOS.
Mr Mitchell claimed that had he remained head of corporate between 2006 and 2008 it would have grown more slowly. “Corporate lending is all about knowing when to lend and at what part of the cycle. When I left it was becoming increasingly difficult to source transactions with the right risk profile,” he said....
“Its important to know where you are in the cycle. It wasn’t they type of lending but the quantum of growth – and that doesn’t just go for corporate but the whole of HBOS,” Mr Mitchell said.
“Whilst it postdates my departure, I think it is fair to say that more directors with direct banking experience may have been beneficial as the financial crisis took hold.”