The decision to aggressively expand Bank of Scotland Ireland's branch network from the beginning of 2006 was a "blueprint for rapid uncontrolled growth with inadequate risk mitigation", a report on the failure of its UK parent company HBOS plc has found.
The report recounts how BOSI acquired a network of showrooms from the ESB and began transforming them into bank branches at a rate of three per month for 14 months from the beginning of 2006.
The bank also gained around 150 non-banking staff and a small finance loan book in the deal.
"At the time, this was presented as an innovative cost effective solution to rapidly achieve a substantial footprint upon which to pursue aggressive growth in market share," the report from the Financial Conduct Authority and the Prudential Regulation Authority stated.
“A branch network would also enable the existing reliance on broker channels to be reduced. This seems to have been a high-risk strategy and it is questionable whether the risks were properly thought through.”
Resources
The report, which details the failure of HBOS in October 2008, said BOSI had an existing staff resourcing issue, aside from recruiting new employees and training the ex-ESB workers, all at a time of planned rapid growth and expansion into new products.
“At the same time the infrastructure, governance and risk management frameworks would need building out to accommodate the planned growth. Finally, BOSI would not initially be in a position to offer current accounts, and so would lack a potential early warning indicator of troubles with its customers.”
BOSI incurred losses of £10.9 billion (€15.6bn) after the financial crash in 2008, which was the “worst loss rate for the group overall”, the report said. BOSI’s business here was closed and Lloyds Banking Group, which took control of HBOS, has since been winding down its problem loan book here.
The report noted that BOSI’s impairment losses grew from £22 million in 2007 to £2.9 billion in 2009 and £4.3 billion in 2010 as the Irish economy deteriorated and the State required a bailout from the EU and IMF in late 2010.
“Ireland was in many ways a more extreme version of the UK experience, resulting in higher loss rates. As the financial crisis took hold and liquidity in the market dried up, both residential and commercial property prices fell drastically – residential prices by around 50 per cent and commercial property by around 65 per cent – contributing to both corporate and retail losses,” it said.
