Banking Crisis - Treasury Contents

Memorandum from Lloyds Banking Group


  1.1 We welcome the opportunity to submit evidence to the Committee's enquiry into the banking crisis.

  1.2 We have focused our comments primarily on the position of Lloyds TSB as the acquisition of HBOS was only completed on 19th January 2009, however, there will be incidences when we refer to the Lloyds Banking Group when we look to the future. We have also made some observations on what underpinned the crisis and the steps taken by the Government and other Tripartite authorities to address the issues.


  2.1 In looking at the current crisis and what needs to be done, we believe it would be helpful for the committee to split the crisis into two parts—the financial markets crisis and the deteriorating global economy.

  2.2 Coming into 2008, the UK economy enjoyed 60 consecutive quarters of sustained expansion. Inflation remained very low globally and in the UK household incomes grew strongly and asset markets boomed, notably housing. This booming economy meant that demand for borrowing outpaced the growth of savings. Banks, therefore, increased their borrowing from the financial markets to meet this demand. At the same time, there was a search for yield by investors who wanted to invest in instruments that would give them higher returns. This, with the demand for borrowing, led to a huge growth in financial innovation and more complex structured credit products.

  2.3 The current banking crisis has happened essentially because of a collapse of confidence which has caused the money and capital markets to stop working properly. In a world which has become very risk-averse, banks and other investors have become reluctant to lend to each other. All banks, including the stronger ones, have therefore faced increased difficulty sourcing funding, this has meant their ability to lend in turn to their customers has been affected.

  2.4 The banks which have borrowed most from the markets have been the most affected. In the UK there is now a lending gap, as foreign and non bank institutions have withdrawn from the market and retrenched to domestic markets. Over the last ten years, these institutions accounted for around half of new corporate loans and approximately 45% of mortgages.


  3.1 We believe that, at a global level, risk was mis-priced and the sophistication of the new instruments out-paced the ability to manage and understand their long term implications particularly in a less benign economic environment. However, this lack of understanding was not just an issue for the banks. Regulators and Central Banks around the world did not always grasp the inter-dependencies in the financial system and the true nature and scale of the risk being taken by some banks. There was also a general lack of understanding of the dependency of the major economies on non-bank financing. To be fair this was always going to be difficult due to the sheer complexity of the system. The priority now is to address the systemic risks and for everyone, including the banks, to work together to restore confidence in the financial system and the economy. We are working hard to that fulfil those objectives.


  4.1 Lloyds TSB entered the financial crisis in a strong position. This was due to our relationship banking strategy, our strong business model, our prudent risk approach and our philosophy of taking a through the cycle approach. Furthermore, we had anticipated that the benign economic environment was unlikely to last and had as a result positioned our business to avoid riskier parts of the lending market.

  4.2  Relationship banking is at the heart of Lloyds TSB's strategy. That means working with and understanding the financial and non-financial needs of its customers, building a relationship with them to help them grow and prosper. Lloyds TSB takes pride in a "through the economic cycle" approach to credit policy, which means stability, thereby helping and working with customers through the good times and the bad.

  4.3 One test of Lloyds TSB's relationship model is whether it is able to quickly respond to the short term borrowing needs of its customers. Because of the strength of its financial position, Lloyds TSB remained "open for business" throughout 2008 and committed to maintaining a broad range of products and actively marketing them to customers. In 2008, Lloyds TSB provided 1 in 4 mortgages and personal loans in the UK and its net mortgage lending was up over 60% in 2008. It was also the first bank to pass on full benefit of the recent Bank of England base rate cuts on variable rate mortgages and to SME customers. In terms of the SME sector, our lending grew by 19%.

  4.4 As a result of our financial strength, in September 2008 we were one of the very few institutions who were in a position to be able to acquire HBOS, when it became affected by the global problems in the banking system.

  4.5 By early October 2008, confidence in the sector was at a low point worldwide and the most important issue was restoring confidence and stability. In the context of the unprecedented turbulence in global financial markets and as part of the Government's action to stabilise the UK banking system, HM Treasury had discussions with Lloyds TSB on the additional capital it would be required to hold, to have access to the Government backed provision of liquidity. Based on these discussions the Boards of both of Lloyds TSB and HBOS agreed to raise £17 billion of capital across both banks, through a combination of ordinary shares, which were underwritten by the Government, and preference shares. We welcomed the investment by the Government as it represented certainty of capital availability and relatively attractive pricing—compared to a traditional rights issue approach. Because of these benefits, Lloyds TSB's already robust capital position was further enhanced and this allowed the Group to drive forward with its plans to help acquire HBOS.

  4.6 On the 19th January, we announced the successful completion of the HBOS acquisition. Lloyds Banking Group has a robust capital position. We also continue to attract funds in the wholesale markets at prices below most of our peers. We continue to believe that the acquisition of HBOS makes a compelling business opportunity as it is a good business, with great brands, great people and has a strong customer franchise.


  5.1 We have been fully supportive of the measures the Government has taken to restore confidence to the banking sector. As we mention above, in October last year, confidence in the sector was at a low point worldwide and the most important issue was restoring confidence and stability. The Government took a number of steps to address these problems which we believed were necessary. The Government showed leadership in the UK and this formed part of a globally co-ordinated approach to addressing the systemic market issues.

  5.2 In January this year, the Government announced a package of measures with the aim of stimulating the economy and encouraging more lending. We welcome this package and are studying these proposals in detail and are having a constructive dialogue with Government particularly around pricing and collateral.

  5.3 However, despite the efforts of banks and the government, there will still remain a gap in lending capacity which has been created by the withdrawal of foreign banks and non-bank institutions. In order to fill this gap, which represents 50% of capacity, the British banks that remain in the market would have to more than double their lending. It is absolutely in line with Lloyds Banking Group's strategy of relationship banking to support our customers and we will continue to help our customers during these difficult times and we will make funds available to customers that meet our lending criteria.


  6.1 We have experienced unprecedented market dislocation across the world in the last 12 months.

  6.2 We support the Government in the steps they have taken to restore capital and funding levels, and in the drive to restore confidence and financial stability.

  6.3 Lloyds TSB has been able to maintain its support to our customers, in particular mortgage customers and SMEs, because building relationships with customers throughout the economic cycle is at the heart of its strategy. Our robust funding position enables us to do this.

  6.4 We are entering a more challenging period for the economy and Lloyds TSB will continue to support its customers during this difficult time, ensuring that they have access to the finance, products, advice and relationships that they require.

February 2009

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