UPDATE 2-HBOS chairman said bank secure months before rescue

Matt Scuffham
Reuters Middle East

* Stevenson said bank was 'in as safe a harbour as possible'

* Stevenson says corporate division grew too quickly

* Says bank had moved to cut dependence on wholesale funding

LONDON, Dec 4 (Reuters) - The former chairman of HBOS told

Britain's financial regulator the bank's financial health was as

secure as it could be, just months before it was rescued by

rival Lloyds and propped up by a government bailout.

Dennis Stevenson said in a March 2008 letter to the

Financial Services Authority that the bank had bolstered its

resilience by adopting a "boringly boring" approach, slowing its

rate of new lending and building up deposits.

"We feel that HBOS, in this particular storm and given its

business characteristics, is in as safe a harbour as is possible

while at the same time feeling commercially rather frustrated,"

Stevenson said in a letter to FSA Chairman Callum McCarthy.

Stevenson, who was HBOS chairman between 2001 and 2009,

also said the bank was "feeling as robust as it is possible to

feel in a worrying environment".

Four months later, HBOS was forced into talks over a

government-engineered takeover by Lloyds, which subsequently

required a 20 billion pound ($32 billion) bailout to survive.

The letter was submitted as evidence ahead of Stevenson's

appearance before the Parliamentary Commission on Banking

Standards, which has set up a panel to examine the demise of

HBOS, once Britain's biggest mortgage provider, and to determine

what lessons can be learned to prevent future bank failures.

Stevenson apologised for the bank's errors at the end of a

three-and-a-half hour evidence session on Tuesday, during which

he had been accused by commission chairman Andrew Tyrie of being

"evasive, repetitive and unrealistic".

"I deeply regret the mistakes made in the corporate lending

book. With the benefit of hindsight I wish we could have done

things to obviate them," he said, after earlier appearing

irritated by the line of some of the questioning.


HBOS was created through a merger between Halifax, a former

English building society, and the 300-year-old Bank of Scotland

in 2001. The bank expanded rapidly using cheap funding on the

wholesale markets rather than safer customer deposits. The

high-risk strategy was exposed when that funding dried up

following the collapse of Lehman Brothers in 2008.

In written evidence to the commission, Stevenson said the

bank had increased its corporate lending too aggressively in the

run-up to the financial crisis of 2008, contributing to its

near-collapse. Impairments on the bank's corporate loans hit 26

billion pounds in 2006.

"It is clear, with the benefit of hindsight, that mistakes

were made in the degree of corporate lending ... The Financial

Services Authority is almost certainly right to suggest that the

corporate division grew too quickly," he said.

However, he told the commission that the bank's demise was

fundamentally caused by the near-closure of wholesale funding

markets in 2008. He said it had taken steps to broaden the

nature of its funding and accelerate the rate of its deposit

growth to address long-term concerns about its reliance on

wholesale markets, but had not foreseen a short-term risk.

"We failed, along with rest of the world, to anticipate the

protracted closure of wholesale markets," Stevenson said.

"The worries we had were long-term worries. Had we thought

for a moment there would be protracted closure of wholesale

markets, we'd have been forced to take action."

Former Chief Executive James Crosby apologized for his role

in the affair when appearing before the commission on Monday.

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