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. WHY DID
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 partsthe 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a lending gap, as foreign and non bank institutions have withdrawn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. POSITION OF
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 pricingcompared 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. GOVERNMENT MEASURES
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.