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2007-2008 were quickly labeled in the history of the global economy as the years of a sharp and pervasive crisis that soon swept the entire world. Being under the pressure of severe economic conditions, a large number of companies failed to make reasonable choices and, as a result, found themselves bankrupt, corrupted, or both, and HBOS is one of such organizations. Despite the fact that the circumstances in which the company found itself on the identified time slot were dire, most of the problems could have been avoided if a more reasonable approach toward risk management could be adopted (Helleiner 2014).
According to the report issued by the House of Commons Treasury Committee (2016), the entrepreneurship started out rather successfully and quickly became easily recognizable as not only one of the safest and the most trustworthy banks in England but one of the most reliable banking organizations period (House of Commons Treasury Committee, 2016). As a result, it had a plethora of opportunities for further development.
However, as the crisis hit, the leaders of the company made a range of dubious decisions that affected the corporation significantly, making the shareholders lose their trust; as a result, HBOS was forced to seek help outside, taking a large loan. Defaulting on its payments after they had gained a significant maturity, the entrepreneurship ceased to exist in 2008.
Despite the harsh economic environment of 2007-2008 that could be blamed partially for the losses that the organization took, in hindsight, it was the inability of the leaders to introduce an adequate risk management approach that would have kept the firm safe from the financial collapse. The broad approach that the organization used prevented from addressing the issues that lied at the core of the organization’s problems and, instead, created prerequisites for making the company vulnerable to the negative external factors. Particularly, the 3LoD model adopted by HBOS to mitigate risks failed due to the lack of ownership in its design and, therefore, the inconsistency in the risk assessment process (Hopkin 2010).
Assessment of Risk
Failing at every level, the team responsible for the supervision of risks and the design of the appropriate strategy could not even conduct a proper assessment of the dangers to which the organization was exposed in the context of the global economy struck by a crisis. According to the recent reports shedding light on the subject matter, “The Board failed to instill an appropriate culture at HBOS or to set out a clearly defined risk appetite for the firm, both of which had significant consequences for HBOS’s business strategy” (House of Commons, Treasury Committee 2016, p. 3).
On a more profound level, the HBOS’s problem was not the lack of an appropriate risk management strategy, but a complete absence of the organizational culture that could have led to the creation of a more efficient approach. As the available evidence shows, the process of risk assessment at HBOS could be defined as reactive and seriously lacked a closer focus on the design of the models that could represent the strategic risks appropriately.
In other words, the frameworks created to simulate the global economic environment in which HBOS was supposed to operate were half-baked and required a scrupulous revision. Providing only a general overview of the situation that could be observed in the 2008-2009 finance market, the identified models could not be used to design a viable approach to managing risks. Arguably, the flaws of the models could have been detected at the earliest stages of their development; however, given the mismanagement of the essential information, it was unlikely that the redesign thereof would have helped the firm avoid bankruptcy, let alone retain its position in the target market (Hopkin 2010).
When considering the elements of the assessment that made the process so convoluted and lacking credible results, one may bring up the fact that the leaders of the organization, as well as its managers, refused from focusing on the means of improving the quality of the firm’s operations. The incorporation of an efficient risk assessment approach is crucial to the following mitigation of threats, as Hillson (2016) explains: “Using risk assessment techniques as a part of BC may inform an existing risk management program and the normal threat mitigation techniques applied” (Hillson 2016, p. 153).
While admittedly understandable at the time of a crisis, the decision to refuse from investing in the update of the information technology used to monitor the changes in the target environment, the inability to conduct proper market research, and a range of other factors made it impossible for the managers of the company to assess the crucial risks in an adequate manner. As a result, the collapse of the entrepreneurship ensued (House of Lords and House of Commons 2013).
As stressed above, the risk response framework that the HBOS Company applied to handle the economic and financial challenges faced in the global economic environment left much to be desired, yet it would be wrong to lay the blame entirely on the choice of the assessment tools. Apart from the incapacity to evaluate the crucial vulnerabilities of the company, the inadequate responses produced by the organization managers can be viewed as the reason for the HOBS Company to fail.
When considering the specific factors that triggered the bankruptcy of the organization one must mention the fact that the essential organizational and business-related processes that determined the success of the firm in the target market spiraled out of control shortly after the managers failed to assess the economic environment adequately: “HBOS’s failure to properly address the 2002 review’s findings by increasing the capital requirement on the bank by 0.5% to 9.5% risky lending” (Karmali 2015, par. 12).
Therefore, it would be wrong even to refer to the actions of the organization as the risk response; instead, the activities maintained by HBOS until its failure can only be viewed as a string of incoherent endeavors at keeping the collapsing entrepreneurship together. As the report produced by the corresponding authorities marked, the firm did not make any progress whatsoever in addressing the risks that had been identified during the previous assessment. In other words, the company took zero actions to prevent threats from coming to life. It would be wrong to assume that the leaders of the entrepreneurship were going to abandon the sinking ship by that time; quite on the contrary, the organization was showing clear signs of strong potential (Treanor 2015).
To the credit of the people at the helm of the company, some of the risks that HBOS was facing at the time were managed correspondingly; in fact, the following overview of the strategy used by the entrepreneurship managers to control and monitor risks was deemed as passable (Perman & Darling 2013). Nonetheless, the following course of actions undertaken by the members of HBOS showed that the attempts at improving the risk response were futile.
Particularly, the inability to respond in a timely manner to the balance sheet weakness that was detected at an admittedly late stage could be considered the reason for the organization’s collapse: “HBOS’s underlying balance sheet weaknesses made the Group extremely vulnerable to market shocks and ultimately failure as the crisis of the financial system intensified” (Financial Conduct Authority &Prudential Regulation Authority 2015, p. 14). The resulting low yields, as well as the rapid increase in the vulnerability rates, served as the platform for the following failure (Binham & Dunkley 2015).
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Surprisingly enough the process of monitoring risks was designed in a rather elaborate manner at HBOS. The team responsible for the risk management processes developed the framework that could react to the changes in the global economic environment fast and, therefore, provides a detailed overview of the possible threats that might have affected the organization. In fact, the essential issues were outlined quite clearly for HBOS:
There needed to be ‘a better understanding of how the three lines of defense work together, in particular the 2nd and 3rd lines and their respective roles, as there is still considered to be significant overlap of work performed and confusion as to ‘who does what and why.’ (Financial Conduct Authority &Prudential Regulation Authority 2015, p. 224)
Therefore, there was an obvious problem with the assessment strategies, as well as the monitoring processes. It could be argued that the inadequate information management system was the primary stumbling block for HBOS. Although the retrieval of the necessary data was quite successful, the following processing of the information and its application to develop the appropriate strategies did not work out for HBOS. Therefore, it can be assumed that there are some data management problems that the company managers should have looked into in order to prevent the further mismanagement of the risk strategy design.
Indeed, there is no need to stress the significance of proper data use in the creation of a viable risk management approach. Although the identification of the possible negative factors is crucial, their subsequent assessment with the following alignment of the company’s priorities is nonetheless essential. HBOS’s managers, in their turn, seem to have skipped the identified stage, preferring to turn a blind eye to some of the crucial threats to the firm’s existence. Thus, it could be assumed that the gravity of the threats that the identified negative factors posed to the wellbeing of the organization (Galliers & Leidner 2014).
Similarly, the issues related to the company’s infrastructure were highlighted from the very start, yet the company managers paid little to no attention to the issues in question, therefore, creating a breeding ground for the on-coming disaster. The inability of the managers to coordinate the data flow, including both the information related to the organization and the one linked to the global market environment, must have contributed to the overall confusion, thus, serving as the foundation for the further problems (Financial Conduct Authority 2015).
At this point, the significance of risk communication as the tool for arranging the data reasonably and distributing it fast needs to be mentioned. As established above, HBOS lacked an appropriate data management approach drastically, which finally lead to the inability to use the available information in a way that would have helped the company benefit (D’Addario 2013). Even though the entrepreneurship lacked the ethics and the corporate values that would have made it stronger in the realm of the global market at the time of a crisis, an introduction of a sensible approach toward the management of the crucial data would have helped the firm refrain from making the mistakes related to the risk assessment (Kendrick 2015).
For instance, some of the threats to which HBOS managers preferred to turn a blind eye turned out to be the game-changers that altered the scope of the company’s operations significantly. Therefore, more accurate use of the available data would have prevented HBOS managers from underestimating the risks. When defining the communication problem that the company was suffering from at the time, one must bring up the fact that the identified issues were closely linked to the hierarchy of the organization:
The Committee also heard evidence suggesting that there was at times a significant disconnect between the priorities set by senior management and actions taken by junior employees. In particular, this was a theme of the Green report into the FSA’s enforcement actions. (House of Commons, Treasury Committee 2016, p. 21)
In other words, the principles that guided the process of reporting, supervising, and distributing roles and responsibilities at HBOS prevented the managers from detecting the threats that the external factors posed to the organization before it was too late.
Findings and Conclusions
The HBOS Organisation has been infamous for the rapid demise that it witnessed in 2008-2009. A closer look at the changes that the entrepreneurship suffered over the course of its existence, in general, and the risk management strategy used in it, in particular, will reveal that the company could have used a better focus on the essential factors that affected its operations. Getting its priorities straight and promoting a better information management strategy would have served as the foundation for building a more appropriate risk management framework.
To be more accurate, a heavier emphasis on the obstacles that the entrepreneurship was bound to witness in the ever-changing realm of the global economy would have helped maintain some form of awareness and might have informed a more responsible approach toward the data management. It would be wrong to claim that the following introduction of a set of more rigid values would have been a possibility, yet the redesign of the information management approach would have created a platform for the creation of a coherent risk management framework, Sadly, HBOS chose a different path for its development, which resulted in the firm ceasing to exist.
Although admittedly sad, the experience described above can be viewed as an important lesson to learn for the firms entering the realm of the global economy. A cautionary tale about the threats of underestimating the dangers of the global economic environment, the story of HBOS should be viewed as the study of the effects that the mismanagement of crucial data and an underdeveloped risk management approach may have on the progress of a world-renowned organization.
Binham, C, & Dunkley, E 2015, ‘Managers blamed for HBOS collapse face limited penalties,’ Financial Times. Web.
D’Addario, FJ 2013, Influencing enterprise risk mitigation, Elsevier, Oxford, UK.
Financial Conduct Authority 2015, Publication of the PRA and FCA review into the failure of HBOS. Web.
Financial Conduct Authority &Prudential Regulation Authority 2015, The failure of HBOS plc (HBOS), Bank of England, London, UK.
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Helleiner, E 2014, The status quo crisis: global financial governance after the 2008 financial meltdown, OUP, Oxford, UK.
Hillson, D 2016, The risk management handbook: a practical guide to managing the multiple dimensions of risk, Kogan Page Publishers, Philadelphia, PA.
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House of Commons, Treasury Committee 2016, Review of the reports into the failure of HBOS: fourth report of session 2016–17, House of Commons, London, UK.
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Treanor, J 2015, ‘HBOS collapse: report recommends formal investigation into executives,’ The Guardian. Web.