Parliamentary Commission on Banking StandardsWritten evidence from Sir Ron Garrick
Introduction
I welcome the opportunity to provide a statement to the Commission on my experiences at HBOS and I hope my contribution will be of assistance in its deliberations. Given the passage of time since the events in question, this obviously has had an impact on the clarity of my recollections. The information in this statement is mainly from my recollection of events in HBOS over the period from early 2000 to the end of 2008 and in order to refresh an ageing memory I have made use of HBOS Annual Reports and Accounts over that period. As those reports are available in the public domain I do not intend to include them in my submission. My submission follows the order of the main subject headings in your letter dated 9 October 2012.
1. Personal
I was appointed a non-executive director of the Bank of Scotland in March 2000 and in April 2001 I joined the HBOS Board on its formation. In December 2003 I was appointed Deputy Chairman of HBOS and from 2004 I served as the company’s Senior Independent Director until HBOS became part of the Lloyds Banking Group in early January 2009. During my service with HBOS I chaired the Nomination Committee and was a member of the Remuneration Committee. I served on two committees in support of the Audit Committee namely the International and the Corporate Risk Control Committees and I chaired the latter. I was also a non-executive director of Bank of Scotland, Ireland.
2. Growth of the HBOS Business
2(1) to 2(3) I joined Bank of Scotland shortly after its bid to take over Nat West had been lost by a narrow margin to the Royal Bank of Scotland. The bank at that time held leading market positions in retail and corporate banking in Scotland but due to its lack of penetration in the rest of the UK and its size, it was constrained in growing shareholder value. Despite the failure of its bid, the BoS Board was keen to find a solution to its constraints and a number of possibilities were explored and rejected during 2000 before discussions commenced with the Halifax. Early discussions revealed very quickly that not only did the organisations have many shared values but also had significant opportunities for growth in a combined business. A merger of equals was agreed with a very clear intention of delivering outstanding outcomes for all its stakeholders through the growth of the operating divisions and the synergies from combining the two businesses. The Board of the new company believed that a new force in banking had been created that would be capable of challenging the “big four” UK banks. Hence growth of the business was a key priority from the outset but managing risk was also a key priority. I shall address this and the Final Notice issued by the FSA on 9 March 2012 at Section 3A below (in answer in part to both of your questions 2(1) and 6(1)) later in this submission. In this regard, it is important in my view, and before dealing with the views expressed in that Final Notice, to consider not only the Group’s growth strategy (as described in this Section 2) but also its risk management processes (described at Section 3 below).
In 2001 there was a considerable amount of work to be done in integrating the two businesses and developing projects to achieve the benefits from the merger and one of the major tasks for the new management team was the compilation of the first HBOS five year plan. This plan took shape in the second half of 2001 and projected outcomes for the years 2002 to 2006. believe that by describing the process in some detail, I can provide answers to most of the questions posed under your heading “Growth of the business”.
Before describing the planning process it might be useful to provide a little more information on the divisional organisation which was set up to run HBOS. The new divisions were a combination of similar functions which existed in the separate Halifax and Bank of Scotland operations. The dominant partner in the combination took leadership for the operations of the new division. For example, the operations of the new Retail division were modelled on the Halifax philosophy while Bank of Scotland was the dominant partner in Corporate. Each division had its own Chief Executive and its own board with all of the functions such as finance, human resources, risk management and internal audit which would be found in a stand-alone business in financial services.
The planning process began by Group preparing a short summary of its overall goals and key objectives for the HBOS business. To the best of my recollection, the summary did not specify the growth expected from the divisions. It certainly made an intellectually strong case for an expectation of quality growth but the Group never set aggressive objectives to be number “x” in any sector. Also if any division had challenged Group thinking on the goals and key priorities contained in the summary, my experience of the people involved and the culture of the organisation tells me that this would have been debated in full to reach consensus.
This outline information was the basis on which the operating divisions were asked to submit their plans and each division was requested to include a section on the risks facing their business. In compiling their plans, each division established its own growth strategy. My recollection of the growth strategies across the individual divisions was as follows:
In Retail, the focus was on value for money products and quality service so that HBOS would become “customer champion” of the sector and appeal to people who wanted to switch accounts.
Corporate planned to capitalise on growth opportunities ansmg from the enlarged HBOS balance sheet and from the development of long term relationships with customers who appreciated the division’s established track record of working through good and bad times.
In International the focus was on leveraging the proven UK model in selected markets where opportunities existed for value added growth.
Treasury was an exception in the growth strategy as its prime focus was to provide liquidity, funding and treasury services to support the Group’s businesses and customers, and confined its trading risks to where knowledge of Group and customer flows created market opportunities or where specialist skills or capabilities existed. Treasury services in both Bank of Scotland and the Halifax had traditionally been conservative operations investing only in high credit rated investments and that was expected to continue. Some growth could be expected due to the increased business that would arise from the bigger operation but there was no appetite in HBOS for Treasury to become an aggressive trader in volatile markets.
When each division completed its plan in accordance with the summary provided by Group and its own growth strategy, the plan was submitted to Group for examination and challenge by the Chief Executive and the Group Finance Director. When agreement was reached on all divisional plans they were consolidated into the five year plan for HBOS and from each of the divisional submissions on risk, Group compiled a summary analysis of the most serious risks facing the business. The final plan was then submitted to the HBOS Board for challenge and approval at a special full day meeting of the HBOS Board. Once approved, the first year plan from the five year plan became the budget for the next year, and this was a key operational management tool at all levels in the organisation.
The 2001 five year business plan preparation became the norm for the annual submission of business plans but planning was not a once a year exercise. The budget for the first year was subject to review by the HBOS Board at the end of the first and second quarters and the new five year plan was presented along with the third quarter results at the end of November. During the course of the year the Board was given presentations from various parts of the business that normally included an update on the progress being made on their key priorities emanating from the annual plan. Also all monthly operating reports showed actual results compared to plan and the previous year.
To the best of my recollection, having a full day meeting (away from the office to avoid distractions) to discuss the plans gave the HBOS Board plenty of opportunity to challenge divisional plans and gain a greater understanding of the strategy and risks. In all of the discussions I do not recall any major challenge to the growth strategy from either the Board or senior management. The Board recognised however that risks had to be addressed and I shall cover this in more detail in the next section on risk management.
From the end of 2001 to the end of 2006, HBOS increased pre-tax profits from £2.9 billion to £5.7 billion which represents compound growth of around 14% per annum. Over those years management had delivered a change programme to achieve greater than planned synergy savings and the businesses had delivered the remainder of the profit increase through growth which I don’t think was ever considered aggressive at Board level. It was a very impressive performance and from memory pre-tax profit in 2006 was within 10% of the plan prepared in 2001 and that for me was an outstanding performance. The merger benefits had been successfully delivered. As a result, the Board in 2006 had great confidence in the leadership of the business and in the fact that the controls and systems being used appeared to be working well, although it was recognised that there would always be a need for an ongoing series of projects in all parts of the business to ensure continually evolving improvements.
In hindsight, economic conditions in the 2001–06 period were fairly benign and helpful to business performance and that must have been a factor in achieving excellent results. The outlook statements in the 2006 Annual Report and Accounts signified that further growth was still possible for HBOS. However any plans for the period after 2006 prepared on the basis of growth would never materialise as a global economic tsunami was on its way that would begin in the second half of 2007 and peak in the last quarter of 2008. That was not foreseen in HBOS and we were certainly not alone in failing to predict its arrival.
2(4) In terms of meeting the expectations of shareholders and investors, there was a clear understanding from day one that HBOS needed to demonstrate that the strategy being followed would deliver growth of quality earnings in addition to merger synergies. I think subsequent results for the period of the first HBOS five year plan did achieve the support of the investment community.
2(5) To the best of my recollection, there was a consensus on the Board and between the Board and the senior executives as to the growth strategy. I describe the position further at paragraph 3(4) below.
2(6) Finally on growth, I am not sure I can provide any answer to explain how the growth strategy was explained and communicated to more junior staff. However, the Chairman had an annual programme for visiting some of the front line areas of the divisions and after my appointment as Deputy Chairman I took part in those visits. From my recollection of those visits I gained the impression that the staff had a clear idea of what was expected of them so the message appeared to be passing down the line but clearly this was only a small sample from a total headcount of 70,000 employees.
3. Risk Management
3(1) and 3(5) Management of risk was always a key priority for HBOS and particularly so for the executive management team and it was clearly a continually evolving process. In order to properly describe the processes and policies within the bank for managing risk, I would refer to the detailed Risk Management commentary in the 2006 Annual Report and I have therefore taken the liberty of attaching that commentary to my statement. I do think it is important for the Commission to see this document because it does show that management of risk was extensive and embedded in all parts of the organisation. There were risk management functions in all divisions and the Group had a substantial role in formulating centralised policies and standards and seeking Board approval for those and overseeing risk throughout the organisation. The Group Internal Audit function and Audit Committee supported by Risk Control Committees (RCC) for each division gave independent assurance on the effectiveness of control systems. I should point out that the RCCs were separate and distinct from the divisional risk committees which formed part of the “first line of defence”. The former supported the Group Audit Committee whereas the latter was part of the risk function within the division itself. The attached Risk Management commentary also provides the information requested on formal models and stress scenarios so I shall restrict my comments to those questions regarding the Board and risk management. The liquidity and broader financial crisis of 2007–2008 was a one in 100 year event which was neither foreseen nor was it modelled because it was such an unlikely event. If it had been predicted, a model would not have been necessary to anticipate the huge impact it would have on companies in the financial sector.
3(2) My recollection is that there was a considerable amount of interaction between the HBOS Board and the risk management function at Group level and I gained the impression that the latter were in close contact with the divisional risk functions. Apart from the process of formal approvals of Group risk policies, there were also numerous presentations at Board meetings from those responsible for risk functions and on a few occasions the Board had presentations from FSA managers to hear at first hand any regulatory concerns. The Audit Committee chairman made regular reports to the Board and highlighted any internal control concerns. With the exception of the Chairman, Chief Executive and Group Finance Director, all directors served on divisional Risk Control Committees (RCC) which were put in place to support the Audit Committee in its work. I served on two of those Committees and chaired one, the Corporate RCC. It might be helpful to explain some of the workings of that Committee.
To the best of my recollection, the Corporate division RCC met four times every year and attendees included:
executives from the line management functions in the Corporate division including the Chief Executive;
representatives from both Corporate and Group risk management functions; representatives from both Corporate and Group internal audit; a Chief Executive of another division;
two non-executive directors of HBOS and on many occasions the Chairman of the Audit Committee;
a representative from Central Services IT;
representatives from the external auditors, KPMG; and
an independent appointee who was not involved with HBOS but who had specialised knowledge appropriate to the subjects being discussed.
The meetings were quite large and subjects discussed could be wide-ranging but would all be related to Corporate division’s operations. Each “function” at the meeting would be asked to give a report on any issues of concern regarding Corporate’s operations so that the Committee was made aware of them and had an opportunity to discuss the actions being taken. Regular subjects covered at the meeting were credit risk, stressed assets, progress on work outs, and every meeting reviewed the progress on key projects being undertaken by the division to improve systems and controls to meet either regulatory or operational risk requirements. Apart from Corporate, there were four other RCCs, namely Retail, Treasury and Asset Management, International, and Insurance and Investment, Minutes from all of those committees were available to all HBOS directors giving them a wide view of risk and control issues across the Group.
3(3) The quality of the papers provided to the Board were in my view consistently of high quality. To my recollection the Board did not make routine risk judgments but did so only in cases such as in approving the budgets and considering the risks highlighted in the plan.
3(4) Turning to the Group Board’s perception of the risk involved in HBOS’s growth generally and including the Corporate division. I did say in Section 2 that growth and managing risk were both key priorities for HBOS. Every financial plan/budget produced by HBOS identified risks and, from my recollection, there was consistency over the years as to what our main risks were. In order of importance we had to rely on wholesale funding; we had to ensure that credit quality was good; we would face regulatory issues, both financial and on customer service, that would have to be well managed. Wholesale funding was explained to the Board in some detail in 2001 since it was the main risk. Briefly, wholesale markets enabled banks to lend or borrow money from each other for short periods. It had been used extensively by Bank of Scotland and to a lesser degree by Halifax in the past and for many years it had been used by many banks as a safe investment for cash and also an acceptable method of funding operations. After due consideration of the risks, it was decided that this method of funding was considered acceptable by the HBOS Board but as our use of this facility would be greater than most other UK banks a number of actions were taken. It became an annual feature at budget sessions for Treasury to make a presentation on how the business plan could be funded and over the years, my recollection is that confidence grew that it was a satisfactory source of funding with a growing demand for securitisation of assets and convertible bonds which HBOS pioneered. Treasury was, however, given the task of lengthening the duration of the borrowings and within a few years Treasury had achieved a position whereby about 50% of our wholesale funding was over 12 months’ duration. Other actions included offering a scrip dividend, increasing the target for dividend cover to 2.5 times and developing actions to increase customer deposits in the Retail, Corporate and International divisions. A share placing was completed in March 2002 for £1.25 billion but this did not please a number of major shareholders who considered our capital ratios were already satisfactory. A number of other strategic options were encouraged and one of the most attractive turned out to be a merger with Lloyds TSB but with the likely difficulty and time involved in gaining agreement from competition authorities, the idea was not pursued.
3(6) You have posed a question regarding the bank becoming exposed to an excessive level of risk and whether the bank took the decision to grow knowing that the risk was excessive or whether the true level of risk was not appreciated. I think the best way for me to answer that question is to quote from the FSA’s Final Notice of 9 March 2012 in which the FSA accepted (paragraph 2.16 and 6.4) “there was a severe financial crisis and economic downturn in the course of the Relevant Period” (period in question was 2006–08) “which had a significant impact on the Corporate division, the full severity of which was not reasonably foreseeable during the early part of the Relevant Period”. The decision to pursue the growth strategy was made in 2001 when the 2007–2008 financial crisis was presumably even less foreseeable than in 2006.
The global financial crisis mentioned above became apparent around August 2007 when banks in the UK began to find it harder to borrow. The unfolding saga of the sub prime mortgage market in the USA was the trigger which caused banks to be concerned that the wholesale market was not as safe as had been thought and liquidity became tighter. Northern Rock was an early casualty and there was an ongoing stream of negative news regarding bank losses and failures in the USA and Europe during 2008. In March of that year, rumours that HBOS was in serious trouble were spread and there was evidence that short sellers were active on our stock. Management responded very well and managed to prevent a mass exodus of deposits but we did lose some major Corporate depositors. The peak of the tsunami came in September 2008 with the announcement that Lehmans had been allowed to fail, causing severe disruption in world markets and making further liquidity problems inevitable. Until this announcement we had been able to secure wholesale funding, sometimes with difficulty, but only on a short term basis; our longer term funding was eroded. In early October 2008, the Government announced its scheme to offer the banks funding. In short, the period from August 2007 until the last quarter of 2008 has been described by some as the most turbulent time ever seen in credit markets and was a once in a hundred years event.
3A. Final Notice on Bank of Scotland 9th March 2012
Reading the FSA Final Notice of 9th March 2012 regarding events in the Corporate division in the period between 2006 and 2008 makes very unpleasant reading. Iam, however, perplexed by many of the comments because they are contrary to my recollection and understanding of how the company was being run and what the Board was being told. In trying to account for the differences between the FSA comments and my recollections and perception, I have a number of thoughts which I think merit consideration. My comments are as follows:
The FSA made a number of visits to the Corporate division from 2001 to 2008 and inspected many of the systems being criticised in the Final Notice. To the best of my recollection, but bearing in mind the passage of time, after each visit there were always issues but there appeared to be a constructive relationship and agreement between the FSA and risk functions at Group and Corporate as to what follow up action was required and when the division would report back on the progress being made in correcting any agreed deficiency. All of those reports were seen by the Board. If the Board of HBOS had received comments similar to those contained in the FSA’s Final Notice, it would have been a major issue and the Board would have demanded immediate action to confirm and resolve the many issues being criticised. I vaguely remember that a detailed inspection was made of Corporate in either 2007 or 2008 and it would be of interest to see how the FSA report of that last visit compared with the findings which have been set out in the Final Notice.
Reference is made to Corporate’s high-risk exposure to property. The Corporate division always maintained that the commercial property assets had always been carefully chosen and that there was no appetite for speculative office development in major UK cities. In addition, most of their commercial loans had gone to projects with substantial pre-lets from highly rated tenants. I was under the impression that the FSA saw some merits in those arguments during their routine inspections. My recollection of the distressed assets showing up in 2008 in the property sector were mostly due to the house building sector because of lack of sales in new developments and the need for fair value adjustments on joint ventures.
On large loans to individuals I do recall that I did take issue with that type of loan around 2003. The Corporate division’s Chief Executive arranged a meeting with the managers responsible for the two large individual borrowers I had identified. The information given to me on both cases showed that although the loan was made to an individual parent company, it was arranged to cover a large number of companies within the individual’s portfolio and the sectors being served were disparate. Those were also long term relationships where in times of difficulty for a part of the portfolio there was a track record of the individual taking a major share of any pain. Hence a general assumption that large borrowings to an individual are all high risk is not completely valid.
In addition to exposures to commercial property, I was aware that equity participation and highly leveraged deals were part of Corporate’s product offering and historically had generated a good contribution towards the division’s profitability. In contrast, I do not recall being aware of a concentration in low-rated and unrated credits.
The Final Notice also takes issue with the movement in provisions but recognises and accepts that provisioning requires the exercise of “management judgement”. My recollection of the HBOS experiences in the turbulent conditions in 2008 was that when things started to go wrong it usually happened very quickly and knock-on events were common. For example, negative comment about HBOS at one time prompted large corporate depositors to move their cash elsewhere and at the same time the negative comments increased the cost of wholesale funds and made it more difficult to secure them. An instant double whammy! The doubling of provisions in HBOS in two months is probably another example of the contagion spreading at speed and asset values falling rapidly in global markets. I do note, however, that the FSA’s Final Notice (at paragraph 4.123) acknowledges that throughout the relevant period, the Group’s overall level of provisioning was acceptable and that Corporate’s level of provisioning fell within (albeit at the more optimistic end) the acceptable range as confirmed by KPMG.
In respect of the period 2006 to 2008, the Final Notice consistently criticises an aggressive growth strategy without proper controls that exacerbated the company’s liquidity problems and resulted in increased impairments. The Final Notice makes it clear ( paras 4.53, 4.61, 4.71, and 4.91) that during this period the plans submitted to the HBOS Board indicated that the business was adopting a selective and cautious approach to lending. My recollection of reports to the Board from Corporate during that time was that competitive pressures in many markets were intensifying and some of our competitors were offering terms such as covenant––light loans that Corporate would never accept and they intended to maintain their longstanding cautious stance in the market place.
I have given much consideration as to how the conflicting statements from the FSA and the company could be reconciled. Using the Annual Reports and Accounts for 2006 and 2007 and the interims for 2008, there is no doubt that loans to Corporate customers did show a large increase. Also, the company’s outlook statements were still forecasting the possibility of some growth in 2007 and 2008 and external economic forecasters were of the same opinion for the UK economy. Those statements do not support the often quoted comment in the Final Notice that the firm recognised “the economic cycle was at or near its peak”.
With the benefit of hindsight, Corporate was probably running the business in a similar manner to that which had been successful since the formation of HBOS. Strong loan origination was a feature of that model as was the syndication of loans and the sale of investments. This meant they were running into some severe problems from the developing crisis in financial markets. The first would hit them in August 2007 when the syndication market effectively closed (this is recorded in the Final Notice para 4.81) and syndication became very difficult. At around the same time with values being attributed to businesses falling as the financial crisis grew, buyers for the Corporate investments disappeared from the market. The result was a very sharp increase in the loan book in the second half of 2007. The Annual Report and Accounts confirm that this did happen. The first half of 2007 showed very modest growth in the loan book but in the second half the loan book increased sharply by around £13.5 billion. Nevertheless, Ido think that the difficulties were brought about by the financial tsunami that engulfed the global economy in 2007–2008.
4. Board Qualifications
I have no doubt that the HBOS Board was by far and away the best board I ever sat on. My recollection of the culture and characteristics of the Board was one of openness, transparency, high intellect, integrity, good working relationships between the Chairman and Chief Executive, and a suitable diversity of backgrounds, mix of experience and expertise to maximise effectiveness. The papers which came to Board meetings were consistently of high quality. If with the benefit of hindsight I was asked if I wanted to sit on this board again I would be saying yes.
The original Board of HBOS had 19 directors mainly due to the merger but by 2007 this had been reduced to 16 with eight non-executives, seven executive directors and the Chairman. The Company Secretary and Group Counsel attended all meetings. The Chairman’s responsibility was to lead the Board and the Chief Executive managed the Group’s businesses. The Chairman also had responsibility for facilitating the effective contribution of all directors and with the size of the Board and large agendas this was quite a challenge. To assist contribution at meetings of the Board, the Chairman did attempt to ask specific directors to lead the debate on specific agenda items but there were always time constraints on agendas. The Chairman encouraged non-executive directors to make direct contact with executive directors if they felt that they had not had the time to ask everything they wanted at the Board meeting.
In response to your specific questions on board qualifications:
4(1) I believe the Board had sufficient qualifications and information to judge risks and challenge risk analyses without any advice from others. In the 2007 Board we had two executive directors who had previously run the HBOS Group Risk function plus two nonexecutive directors with relevant bank experience. Other non-executives had wide business experience which was also relevant to business risk issues.
4(2) As mentioned above there was a responsibility for the Chief Executive to manage the business and oversee the executives in all divisions but through their presence on divisional RCCs non-executives also had an opportunity to challenge executives on any aspect of divisional operations.
4(3) Central challenge and disciplining of divisions fell into the Chief Executive’s responsibilities and I would have expected other Group executives would have assisted in that process.
5. Role of Non-Executive Directors
In response to your specific questions on the role of non-executive directors:
5(1) Non-executives had excellent opportunities to challenge executives at the full day sessions to discuss budgets and strategy. As stated above, the diversity of backgrounds and the mix of experience was extensive.
5(2) Non-executives had access to the Company Secretary and Group Counsel for his advice. In addition, in the furtherance of their duties, non-executives were entitled to seek independent professional advice at the company’s expense.
5(3) Liquidity was always on the agenda at annual budget reviews and at the Treasury RCC meetings, and I know asset quality and risk management processes were discussed at the Corporate RCC on a regular basis as part of a review of stressed or impaired assets.
5(4) The best opportunity for challenging divisions would be at the budget review sessions and at RCC meetings. There was a reduction in non-executives’ ability to challenge corporate asset quality risks around 2003–04. It had been the practice in Bank of Scotland for all corporate loan approvals to have two non-executive directors to sign off their approval of all loans above £20 million ( I think). The FSA asked Corporate to remove non-executives from that process as their involvement in agreeing loan approvals would affect their independence.
6. The divisions
6(1) When HBOS became part of the Lloyds Banking Group in early January 2009, I had no further involvement in the business so it is not possible to say what areas suffered most. Given the severe economic downturn which the business experienced after the events of 2008 I would have expected that all parts of Corporate’s activities would have faced some ongoing difficulties. I did make comment on this question in Section 3A.
6(2) I have no detailed knowledge of the lending practices in other banks so I cannot comment.
6(3) I know that there was a system for signing off loans but due to the passage of time I can no longer remember the limits for different levels in the organisation. I have commented on the Corporate Risk Control Committee in section 3 and have nothing to add.
6(4) & (5) As the liquidity crisis deepened, I can remember Board discussions on Treasury investments where fair value adjustments were required due to a lack of buyers. There was some hope that most of the investments would be re-paid when due but I suspect the failure of Lehmans and others would have resulted in losses. Whilst Treasury did their own ratings and had managed to avoid exposure to sub-prime mortgages, there were other investments on which they were less fortunate. Treasury did have the ability to trade where they had a specialist knowledge and I think this may have been the cause of the problem but my recollection of events is rather hazy and Isuspect you will receive fuller explanations from others.
6(6) My knowledge of specialised mortgages was that it was run out of Birmingham Midshires, a company within Retail, and catered for mortgages such as self-certified or buy to let. Specialised mortgages were considered higher risk and priced accordingly. It was a Halifax company at the time of the merger and whilst I am fairly sure the HBOS Board had a presentation from the managing director of the company, the policies and strategy were probably executive decisions.
(7) The International division was formed from pre-merger Bank of Scotland operations in Australia, Ireland and New York and from Halifax operations in Germany, Holland and Spain. In time, three operations emerged, namely Bank West in Australia, Bank of Scotland, Ireland, and Europe and North America. For the first few years after the merger the overseas companies continued reporting into the Retail, Corporate and Insurance and Investment divisions. A decision was taken in 2004 to combine those operations into one division in order to leverage proven UK models into the overseas businesses where opportunities existed for value-added growth. The division was run by an executive director of HBOS and there were non-executive directors of HBOS appointed to the Australian and Irish boards. The advantages of such an organisation were seen to be an extension of the overseas product offerings from across the whole of HBOS rather than being an offshoot of the Retail, Corporate and Insurance and Investment divisions. By 2007, the division was contributing about £750 million pre-tax profit which was about 16% of total group pre-tax profit. The division was making good progress in developing specific products suitable to the market place in which it was operating and faring well against the local competition. When the liquidity crisis arrived, we were forced sellers of Australia for liquidity reasons and the Irish operation was, I expect, about to share the same experiences that most other Irish banks suffered in 2009 and I am not sure what became of Europe and North America as part of the Lloyds Banking Group. The decision to set up the International division was logical, it was producing reasonable returns within three years of starting up and making progress but it was caught up in a global crisis that seriously affected many financial services businesses. If that had not occurred and more normal economic conditions had prevailed, I suspect that the International division would probably have fared quite well.
7. Wholesale funding
I believe the questions posed have already been discussed in Sections 3 and 4 of this statement.
6 November 2012