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LONDON (Reuters) - The former chairman of HBOS told Britain's financial regulator the bank's financial health was as secure as it could be, just months before it was rescued by rival Lloyds and propped up by a government bailout.
Dennis Stevenson said in a March 2008 letter to the Financial Services Authority that the bank had bolstered its resilience by adopting a "boringly boring" approach, slowing its rate of new lending and building up deposits.
"We feel that HBOS, in this particular storm and given its business characteristics, is in as safe a harbour as is possible while at the same time feeling commercially rather frustrated," Stevenson said in a letter to FSA Chairman Callum McCarthy.
Stevenson, who was HBOS chairman between 2001 and 2009, also said the bank was "feeling as robust as it is possible to feel in a worrying environment".
Four months later, HBOS was forced into talks over a government-engineered takeover by Lloyds, which subsequently required a 20 billion pound bailout to survive.
The letter was submitted as evidence ahead of Stevenson's appearance before the Parliamentary Commission on Banking Standards, which has set up a panel to examine the demise of HBOS, once Britain's biggest mortgage provider, and to determine what lessons can be learned to prevent future bank failures.
Stevenson apologised for the bank's errors at the end of a three-and-a-half hour evidence session on Tuesday, during which he had been accused by commission chairman Andrew Tyrie of being "evasive, repetitive and unrealistic".
"I deeply regret the mistakes made in the corporate lending book. With the benefit of hindsight I wish we could have done things to obviate them," he said, after earlier appearing irritated by the line of some of the questioning.
HBOS was created through a merger between Halifax, a former English building society, and the 300-year-old Bank of Scotland in 2001. The bank expanded rapidly using cheap funding on the wholesale markets rather than safer customer deposits. The high-risk strategy was exposed when that funding dried up following the collapse of Lehman Brothers in 2008.
In written evidence to the commission, Stevenson said the bank had increased its corporate lending too aggressively in the run-up to the financial crisis of 2008, contributing to its near-collapse. Impairments on the bank's corporate loans hit 26 billion pounds in 2006.
"It is clear, with the benefit of hindsight, that mistakes were made in the degree of corporate lending ... The Financial Services Authority is almost certainly right to suggest that the corporate division grew too quickly," he said.
However, he told the commission that the bank's demise was fundamentally caused by the near-closure of wholesale funding markets in 2008. He said it had taken steps to broaden the nature of its funding and accelerate the rate of its deposit growth to address long-term concerns about its reliance on wholesale markets, but had not foreseen a short-term risk.
"We failed, along with rest of the world, to anticipate the protracted closure of wholesale markets," Stevenson said.
"The worries we had were long-term worries. Had we thought for a moment there would be protracted closure of wholesale markets, we'd have been forced to take action."
Former Chief Executive James Crosby apologized for his role in the affair when appearing before the commission on Monday.
Editing by David Goodman and Helen Massy-Beresford