HBOS chief executive Andy Hornby conceded that the bank’s funding model was too dependent on the wholesale markets.
Explaining why HBOS needed a rescue merger with Lloyds TSB, Mr Hornby said: “We found ourselves impacted by the wholesale markets shutting. We were particularly dependent on wholesale funding.”
HBOS was exposed because of its £198bn socalled “funding gap” – the difference between customer deposits and customer loans. The funding was originally provided by institutions through the money markets, but they have shut down on fears about the declining quality of assets and the longevity of the banks.
At one time, a bank would have lent out only what had been deposited by customers. But, as the markets grew more sophisticated, new funding lines developed.