What is was it?
Formed from the combination of Halifax (a building society) and Bank of Scotland (a Scottish bank) in 2001, HBOS was able to trace its roots all the way back to the 1850s.
At that time, people in Yorkshire set up a self-help organisation called the Halifax to enable them to buy houses. The idea was simple - industrious Yorkshiremen saved money and the Halifax lent it out again to those among them who showed signs of being able to pay it back.
Thanks to this business model, Halifax survived the UK recession and house price crash of the 1990s and remained profitable throughout.
However, things changed 10 years later after the company merged with Bank of Scotland and went public. Watching rival mortgage lenders leveraging up their deposit base and lending more and more money to home owners for a higher and higher profit, HBOS decided to do the same.
By 2008, HBOS was the UK's largest mortgage provider and a huge two in five of the nation's householders were HBOS customers.
What's it got to do with the financial crisis?
On 18 September 2008, HBOS was acquired by rival UK bank Lloyds TSB for $22bn. The move followed a scary few days in which HBOS very nearly went the way of Northern Rock.
HBOS's main problem was a lack of confidence. Following the collapse of Lehman Brothers on 15 September, confidence in the banking sector globally was severely dented. As a result, banks became highly unwilling to lend to each other.
Among British banks, HBOS was particularly dependent on this kind of funding. According to an estimate by Citigroup, the difference between its customer deposits and its funding requirements was a huge of 198bn.
City traders knew this. And they also knew the bank would be in trouble if it couldn't access the funding it required. They therefore began short selling short selling HBOS stock in the belief that it could only fall. On Monday 15 September, HBOS shares fell 17.5% in value. And the next day they dropped a further 40%.
As the share price fell, fears grew that customers would queue up to remove their money from HBOS in much the same way as they'd done for Northern Rock - namely, that there would be a 'run on the bank'.
The last-minute purchase by Lloyds TSB prevented this from happening. The British government helped negotiate the deal. Having failed to achieve a similar outcome with Northern Rock, it was keen to avoid a repeat of the same problems with HBOS. Following further falls in HBOS' share price in early October, there were fears that Lloyds would pull out of the deal, but the government remained adamant that it would go ahead. Lloyds took a drubbing, however, as HBOS incurred 10 billion of losses, weighing on Lloyd's share price and capital.
Last updated on 7 September 2009.
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