The history of recent banking collapses is littered with tales of inadequate risk management and poor lending decisions. What is frequently forgotten is that the treasury operation plays a crucial role in any financial institution and the wrong incentives and strategy can hasten a bank’s decline.
When Northern Rock ran out of money, just weeks into the credit crunch, warning bells should have been set ringing throughout the UK banking industry. It didn’t happen. The next treasury to have been caught short was HBOS. Here was an operation that, during the good times, was one of the best at utilizing the capital markets. It played in all the leading currencies and debt sectors. In 2003, HBOS even invented a new asset class – the structured covered bond – ostensibly because it wanted to diversify its investor base. The reality was that investors were running out of credit lines for the HBOS name – a new issuer entity and investor base was a means of getting more funding.
The tale is instructive. A bank’s treasury team should be able to sound the alarm that the balance sheet’s rate of growth is inappropriate – which it clearly was for HBOS.