Case Study: Groupthink at the Top: The Collapse of HBOS It seemed like a merger
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Case Study: Groupthink at the Top: The Collapse of HBOS It seemed like a merger made in financial heaven. In 2001, the Halifax Building Society of Britain merged with the Bank of Scotland to form HBOS. The union made a lot of sense. Halifax was a successful retail mortgage lender and Bank of Scotland had experience in corporate lending and treasury investments. Between them, the two well-respected institutions had 450 years of banking experience. Their combined assets of 30 billion pounds made HBOS one of the largest financial institutions in the United Kingdom. Yet, seven years later, HBOS collapsed in one of the biggest bank failures in British history. The seeds of the bank's destruction were sown shortly after its formation. HBOS executives set out an aggressive growth strategy for HBOS based on increasing loan volume 17% to 20% a year. To reach this target, commercial loan officers had to target smaller, riskier borrowers Financial regulators warned HBOS of the dangers of making such risky loans, but bank officers ignored their advice. When money loaned far outstripped deposits, the bank had to turn to outside underwriters for funds to make more loans. This made HBOS extremely vulnerable to downturns in the financial markets. When the mortgage crisis began in 2007-2008, many borrowers defaulted and HBOS couldn't raise additional money to cover its losses. The British government forced HBOS to merge with the Lloyds banking group. However, government officials later had to inject 20.5 billion pounds into HBOS to keep it afloat. A 2013 British Parliamentary review of the bank's collapse was titled "An Accident Waiting to Happen." Investigators condemned the bank's board and top managers, declaring, “The history of HBOS provides a manual of bad banking."1 Not only was the bank's growth strategy far too ambitious, the firm lacked adequate controls to estimate and control for risk. Loan officers were rewarded for reaching sales targets, not on the quality of their loans. Most of the firm's members had little or no expertise with risk management. Government regulators failed to carry out their responsibilities. Groupthink also played a significant role in the bank's demise. The top executive team, made up of bank chairman Dennis Stevenson, chief executive officers (CEOs) James Crosby and Andy Hornby, and commercial lending chief Peter Cummings, was supremely confident. In retrospect, their optimism appears delusional. In 2001, the chairman stated that any higher losses from making risky loans would be "more than compensated for by higher product margins."2 In 2006 and 2007, bank officers boldly proclaimed that the bank was adequately managing its risks and that they were more skilled than their competitors. (This despite the fact that Cummings was the only senior official with significant banking knowledge and experience.) As the global financialExplanation / Answer
Answer 1:
Yes, Top management team are more vulnerable to groupthink than managers at lower levels of organization: Because the top management are in high stress and pressure to ensure that the organization achieves the desired growth path and run on the success path, so that organization will survive for longer time. So top management are always in the thought process to put the organization on success path. This makes them more vulnerable than managers at lower level of organization, as the lower level managers do not have that kind of pressure for business survival. So they are comparatively free and can have more thought towards group think.
Answer 2:
Symptoms of group think do you note in the HBOS top management term and board of directors: The top management of HBOS and board of directors want to achieve the high growth rate for the HBOS. They want to have 17% to 20% of loans for better revenue generation for the HBOS. They do not have proper planning and risk management at the HBOS. They do not care other quality characteristics and risk factors for the HBOS.
Answer 3:
Group think can be prevented in this case by developing a process of proper risk assessment and recovery capability from the people towards their bank loans. The HBOS needs to have better monitoring process for its overall control over the bank operations in terms of repayments of the loans. The bank needs to have better processes for ensuring that their loan processes are running adequately and meeting / exceeding all basic quality and risk factors.
Answer 4:
Yes, the top leaders at HBOS should be held accountable for the collapse of the HBOS.
Answer 5:
Yes, the Accounting firm KPMG be punished for giving HBOS a clean financial bill of health even it was at near the collapse because the KPMG had made incorrect accounting practices and they released dummy report for HBOS. If their report was genuine, then it could be an eye opener for HBOS and HBOS can react or initiate before its HBOS collapse.
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