The distraction of Basel II April 5, 2013 at 4:38 pm

From the Parliamentary Commission on Banking Standards report into the collapse of HBOS:

A huge amount of regulatory time and attention, in relation to HBOS as with other banks, was devoted to the Basel II model approval process… HBOS attached importance to obtaining the so-called ‘advanced status’, because it would potentially enable them to hold a lower level of regulatory capital.

The HBOS application was then granted in September 2007, subject to conditions that needed to be satisfied by 1 January 2008. Michael Foot (the FSA Managing Director for Deposit Takers and Markets 1998-2004) described Basel II as “immensely complex and immensely resource demanding” and “a complete waste of time”…

From 2004 until the latter part of 2007 the FSA was not so much the dog that did not bark as a dog barking up the wrong tree. The requirements of the Basel II framework not only weakened controls on capital adequacy by allowing banks to calculate their own risk-weightings, but they also distracted supervisors from concerns about liquidity and credit; they may also have contributed to the appalling supervisory neglect of asset quality.

4 Responses to “The distraction of Basel II”

  1. The Tyrie report notes the poor quality banking book at HBOS but the trading book was bad too (and undercapitalised thanks to Basel 2). Why did it have £17bn in Level 3 Alt-A US RMBS?! Oh. Because it was AAA and so a risk free yield pickup.

    HBOS seems to be a consummate bank failure: bad banking book, bad trading book, bad funding model, badly undercapitalised.

  2. Yep, although the trading book was relatively small and bad in a we-bought-bad-credit-assets way rather than a we-took-huge-punts-that-went-wrong way. The real issues, as you say, were bad credit judgements, mostly in the banking book, a terrible funding plan, and too little capital. Mind you, given the credit issues, HBOS would have required at least twice as much capital as they had, which was near unthinkable in 2005, so if I had to pick one lesson from many it would be don’t lend money to people who won’t pay you back…

  3. […] That most authoritative of news sources, the Daily Mash, has drawn their own conclusions from the HBOS report: […]

  4. Yeah and don’t lend to the same company at equity, mess and senior levels. Dude, that’s like Corporate Finance 101