On 10 February 2009, as part of its wider inquiry into the banking crisis, the Treasury Committee held an evidence session with former executives of RBS and HBOS. The session focused on the recent events involving these banks, their remuneration policies, the relationship with the FSA and the role of non-executive directors.

The Committee heard evidence from the following witnesses:

  • Sir Fred Goodwin, former Chief Executive, RBS
  • Sir Tom McKillop, former Chairman, RBS
  • Andy Hornby, former Chief Executive, HBOS
  • Lord Stevenson, former Chairman, HBOS  


The Treasury Committee was extremely critical of the actions of the former bank executives despite their profound apologies. The Committee’s aim was to find out how the current situation arose, how to get through this situation and what the future of financial regulations and services will look like. The Committee was disparaging with regard to the issues relating to both banks’ remuneration policies.  

RBS: general overview

The former executives of RBS were accused of “destroying a great British bank” and it was clear that RBS was condemned more heavily in light of recent events. The former executives of RBS opened by saying that they knew that the economy would slow down at some point, but insisted that they had not anticipated the sheer scale and the speed at which this would occur.

Sir Fred Goodwin admitted that RBS had a poor leverage ratio of 110 per cent at the time of Lehman’s demise.  


The Committee adopted a negative view regarding RBS’ remuneration policies. The Committee argued that it contributed as one of the factors that led RBS to fail. Moreover, at least one member of the Committee, Nick Ainger, took a dismal view of RBS even considering the payment of bonuses in light of the bail out by the government.  

Sir Fred Goodwin argued that remuneration did not encourage excessive risk taking and that it did not represent one of the causes of the bank’s problems. He argued that traders were trading within their set limits, as they were authorised to, and that these limits had been set based on RBS’ perception of the risks. The issue was the perception of the risks; RBS had believed that triple A-rated securities indicated low risk. However, with the benefit of hindsight, these securities turned out to be high risk.  

Sir Tom McKillop contended that investment banking is highly competitive and there was a need for RBS to pay bonuses. However, he did agree with the Committee that there is a need for change in the remuneration practices in banks generally although any changes had to be done in a consistent and coherent way to avoid the risk of losing people overseas.  

ABN Amro

The Committee was particularly critical of RBS for its purchase of ABN Amro arguing that RBS had severely overpaid for this acquisition and had not carried out sufficient due diligence.  

Sir Tom McKillop apologised for RBS buying ABN and admitted that it was “a bad mistake.” He said the timing had been bad and he conceded that RBS had overpaid. However, he said that, at the time, there had been widespread support for the acquisition and RBS had obtained approval from both the FSA and shareholders. He contended that sufficient due diligence had been carried out on ABN although he did admit that a significant part of RBS’ recent write downs was due to ABN.  

Colin Breed stated that ABN was just one of twenty-six acquisitions that RBS had made in a short period of time. He questioned whether the majority of those acquisitions had been good value for money. Sir Fred Goodwin responded that some of these acquisitions had proved to be better than others, but that it was a reality of business that judgements had to be made and these were not always right.  

Relationship with the FSA

The Committee, in particular Mark Todd, was curious to know the level of FSA involvement with RBS. Sir Tom McKillop declared that RBS and the FSA had an ongoing and close relationship at all levels throughout the organisation. He reinforced this view by stating he was happy to have had this confirmed in the FSA Arrow reports. He admitted that he did not believe that the FSA lacked any understanding of the organisation.  

HBOS: general overview

The former executives of HBOS admitted that the main factors that had contributed to the demise of HBOS were liquidity pressures which resulted from reliance on the wholesale markets and its exposure to some sectors of the UK commercial property market. However, the Committee saw this as a “blame game” and were surprised that the failure of HBOS was simply because it failed to predict the collapse of the wholesale markets. The Committee adopted the view that it was a failure to calculate and manage risk.  


The former executives of HBOS argued that the current bonus system used generally amongst banks worldwide focused on rewarding workers for short term results rather than considering whether the decisions which had been made would prove to be correct in the long term. Andy Hornby commented that “substantial cash bonuses do not reward the right kind of behaviour.” However, Lord Stevenson commented that HBOS had in place a long term remuneration policy, which aimed to encourage senior executives to reinvest in HBOS’ shares for a number of years. Andy Hornby told the Committee that in 2000 he had invested his entire cash bonus in HBOS shares and had subsequently suffered a loss as a result. He reiterated that future developments regarding changes in remuneration in all banks should focus on whether they ensure that annual bonuses are being tied in for the long term.  

Role of non-executive directors

John Thurso concentrated on the issue of corporate governance and, in particular, the role of non-executive directors. He questioned whether non-executive directors are capable of having any relevance in relation to the risk strategies of banks.  

Lord Stevenson explained that HBOS had an audit committee that operates independently. There were also audit committees for each subsidiary business, which they called risk committees, and each of those committees was chaired by a non-executive member of the board with at least one other non-executive member of the board on it. Accordingly, non-executive directors were relevant in relation to the risk strategy of HBOS. Furthermore, he strenuously argued that all difficult issues on risk were ventilated to the board of directors but this did not necessarily mean that the board was always right. He explained that an essential requirement in order for non-executive directors to add value to a board is to have people who are prepared to invest a lot of time in learning.

Future prevention of a similar banking crisis

The Committee ended the session with a brief discussion on how to ensure banks are secure in the future. The Committee asked the RBS and HBOS former bank executives which option out of three they would choose if a similar future banking crisis occurred again. The options were: let the taxpayer accept the risks (as had, in fact, happened), or rely on the regulators to identify where the risks are that the banks do not see and to clamp down accordingly to prevent bank failure, or to let the government take action to separate risky investment banking from traditional retail banking. Unanimously, all the former bank executives chose reliance on the regulators.

What next?

The Treasury Committee’s inquiry continues. The next hearing is scheduled for 11 February 2009 when the Committee will be examining the current bank representatives.