i don't need it to be 8 pages as there are only 2 questions though i need it to be 2000 words which is 1000 words each question
2 BACKGROUND INFORMATION One upon a time (more than 300 years ago), the island of Great Britain had three kingdoms: Scotland in the north and England and Wales in the south. In 1707, Scotland united with England and Wales, creating the kingdom of Great Britain.1 Prior to the Global Financial Crisis, Scotland had two major banks, both based in Edinburgh (the capital of Scotland) • The Bank of Scotland (BOS) which was established in 1695. • The Royal Bank of Scotland (RBS), which was established in 1727. In the 1990s, both Scottish banks decided to expand by competing with the larger banks which were "south of the border" (i.e. in England). The Bank of Scotland took over an English Bank called Halifax and the merged entity became HBOS (=Halifax + BOS). HBOS later expanded into Ireland and Australia (it owned Bankwest, which is based in Western Australia). HBOS also became involved in structured finance operations, via a subsidiary called Grampian. HBOS became the fifth largest bank in the United Kingdom. RBS took over a large English bank called NatWest and the merger was quite successful, leading to an increase in profitability. RBS then made several more acquisitions, in the USA and several other countries. In the United States, RBS bought a bank called Citizen’s, and also an operation involving structured finance which was based in Greenwich. By the end of 2007, RBS became the largest bank in the world (measured by assets). Both banks appeared to be very successful during the period from 2000 to 2007. Their profitability and their share prices increased. However, both banks suffered catastrophic problems during the Global Financial Crisis – especially after the collapse of Lehman Brothers in mid‐September 2008. The graphs on the next page show the share prices of HBOS and RBS. 1 Much later, Great Britain joined up with Northern Ireland, and together these countries form the United Kingdom. 3 4 In September 2008, a few days after Lehman collapsed, HBOS needed to be rescued. The government agreed to allow another bank, Lloyds, to take over HBOS. (It took a while to organise this, so the takeover was not completed until January 2009). On October 7, 2008, three weeks after the collapse of Lehman, the chairman of RBS rang up the Chancellor of the British government and said that he thought RBS bank would be insolvent within a few hours, unless the government rescued them. These banks were both “Too Big to Fail”: the failure of either bank would have had devastating consequences for the British economy. So the government did intervene, providing both liquidity and capital to both banks (and a few other smaller banks as well) • Liquidity. In October 2008 both banks had to borrow billions of dollars from the Bank of England to meet liquidity needs. (In the reports, this is called “Emergency Liquidity Assistance”). HBOS borrowed £25 billion and RBS borrowed £29 billion plus $25 billion in US dollars. This was done secretly because no one wanted the general public to realise the severity of the problems at these banks. • Capital. Both banks desperately needed additional capital, which was provided by the UK government. The banks raised capital by issuing new shares, which were then purchased by the government. For HBOS, the government provided several billion dollars in capital in October 2008. The government also arranged for a stronger bank (Lloyds) to take over HBOS in January 2009. However this turned out to be a bad deal for Lloyds, because Lloyds soon discovered that HBOS’s losses were even larger than expected. As a result, Lloyds itself needed to obtain more capital from the government. The total amount provided to cover HBOS’s losses was above £20 billion. After the bailout, the UK government owned 43% of Lloyds. It would be fair to say that these cases indicate some serious flaws in the management and regulation of British banks. The British regulators were the FSA and the Bank of England. • The Financial Services Authority (FSA) which was responsible for prudential supervision. The FSA’s role was roughly equivalent to the Australian APRA. • The Bank of England was the central bank which was responsible for financial stability. The Bank of England’s role is roughly equivalent to the Reserve Bank of Australia. 5 The FSA was severely criticised for failing to prevent the enormous losses caused by the failures of HBOS and RBS. The FSA was abolished in 2012 and replaced with two new regulators (the Financial Conduct Authority and the Prudential Regulation Authority) Your task: Write an essay (2000 words) to answer the following questions: Q1. Why did HBOS fail? Your answer should include a description of o Weaknesses in the management of lending (credit risk) o Weaknesses in the management of liquidity risk (funding) o Weaknesses in the Board of Directors and Risk Management Controls Q2. Why did the FSA fail to prevent this failure? Recommended Sources: Some useful source material will be provided on iLearn, in a folder labelled Sources for HBOS Assignment. These sources include An Accident Waiting to Happen: The Failure of HBOS. The House of Commons Parliamentary Commission on Banking Standards, (2013), https://publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/144/144.pdf Hubris: How HBOS wrecked the Best Bank in Britain, by Ray Perman. Perman is a journalist so this is well written and easy to understand. You don’t have to read all of the historical information going back to 1695! The most relevant chapters for your report are Chapters 14, 17, and 18, and these are available on iLearn. If you want to read more, the entire book is available in electronic form via the University library, via the Proquest ebook library (Just search for “HUBRIS HOW HBOS WRECKED” on the library’s Multisearch). The Failure of HBOS plc. A report by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (November 2015) https://www.bankofengland.co.uk/- /media/boe/files/prudential-regulation/publication/hbos-complete-report. This is a very long detailed report, it has a lot more information than you need to write your essay – but the executive summary is only about 30 pages. Final Notice from the Financial Services Authority to Bank of Scotland plc, dated 9 March 2012, https://www.fca.org.uk/publication/final-notices/bankofscotlandplc.pdf This is a critique of the bank’s risk management standards, written by the regulator. It tends to get a bit technical. 6 You might also find it useful to look up information on Factiva. Factiva is an electronic database which is available via the Macquarie University Library. It has articles from a very wide range of sources, including most of the major newspapers and from financial news services. It is very helpful for studying financial history and keeping up to date with developments in financial markets. We will provide a brief video to show you how to look up information on Factiva. In order to find academic research papers, you can look on Google Scholar. Most of the papers listed on Google Scholar have been published in peer-reviewed academic journals – so they are likely to be more accurate than other information available on the internet. Most of these papers will also be available (for free!) via the University library’s website (using Multisearch). Referencing You should ALWAYS give your references – the Uni has an academic honesty policy which requires this. If you do not cite your references, then you may face disciplinary action and you will certainly lose marks. There are several different referencing styles. You may use Harvard Referencing – a guide is available at http://www.citethisforme.com/harvard-referencing. If you wish to use a different form of referencing, that’s fine, as long as you provide all the same information specified in the Harvard Referencing System. (Most referencing systems provide the same information, but it is just presented in a different order and format). Wikipedia and Investopedia Wikipedia and Investopedia often have good summaries of the facts, and may also give you some references for further reading. So these sources are not bad starting points. However if you simply summarise a Wikipedia article you are unlikely to get good marks. You are likely to get higher marks for your reports if you do some additional reading and thinking. You should be aware that sometimes Wikipedia may NOT always be reliable. This is especially likely to be a risk in controversial cases and/or where the people involved in the case try to change the Wikipedia entries to make themselves look better (I’ll point out some examples of this during the term). So it is a good idea to check other independent sources. 7 Marking Criteria Your report will be assessed on (a) your demonstrated understanding of the issues and (c) your ability to communicate clearly. Lending Does the student show a good understanding of the reasons for HBOS’s enormous losses? 5 marks Liquidity Does the student show a good understanding of the reasons for HBOS’s liquidity problems? 3 marks Board of Directors / Risk Controls Does the student show a good understanding of the weaknesses in HBOS’s board of directors and risk management controls? 2 marks Regulation Does the student show a good understanding of the reasons why the FSA failed to prevent the failure of HBOS? 3 marks Presentation Is the information presented clearly? Does the report have headings and diagrams or graphs (where appropriate)? Does the report have a logical structure? Is the report presented in the student’s own words, or is there an excessive reliance on cutting and pasting? Has the student provided references for all sources of information? 2 marks Total 15 marks Warning against a Cut-and-Paste approach Note that if you simply copy sections from any source (i.e. cut-and-paste), you have not demonstrated much understanding – it simply demonstrates your ability to cut and paste (which is a useful skill but not what we are looking for here!). So please express the ideas in your own words. You will not get