This stark comment from Archie Kane, Lloyds Banking Group’s board representative for Scotland and executive director with responsibility for the institution’s insurance division, underlines the massive scale of HBOS’s problems in the days after the collapse of US investment bank Lehman Brothers in September last year. And it provides yet further evidence that campaigns to keep HBOS independent never had any chance of success.

However, it may also fuel further questions among Lloyds’ shareholders about the wisdom of the takeover of HBOS and the price paid for a bank which was “finished” as a stand-alone institution.

Former Royal Bank of Scotland chairman Sir George Mathewson and former Bank of Scotland chief executive Sir Peter Burt mounted a two-week campaign in November last year to take management control of an independent HBOS, putting up this proposal as an alternative to the rescue takeover by Lloyds TSB which formed Lloyds Banking Group.

Politicians also lamented the loss of HBOS’s independence.

Kane, who came from the Lloyds TSB side of the deal, told MSPs yesterday that the ailing HBOS had effectively “shut down” to business customers in 2008 as the global financial crisis intensified.

The government in autumn last year had to pledge £17bn in support of Lloyds TSB’s rescue takeover of HBOS. This capital injection gave taxpayers a 43% stake in Lloyds Banking Group.

A further £6bn is being injected by the government as it participates fully in the £13.5bn rights issue launched by Lloyds Banking Group last month. This injection will maintain the UK taxpayer’s stake at 43%.

Kane, who was appearing before Holyrood’s economy committee as part of its inquiry into the future of the banking sector in Scotland, said: “I think it’s quite clear now that HBOS could not have survived on its own – HBOS was finished as an entity.”

He added: “HBOS in terms of the corporate, SME (small and medium-sized enterprise) market basically shut down in 2008.

“It just wasn’t operating because it basically ran out of liquidity and funds.”

However, he insisted that Lloyds Banking Group was now “breathing life” back into Bank of Scotland, which will be its main brand north of the border.

“The Bank of Scotland is up and running,” Kane told MSPs yesterday.

“It’s open for business. It’s competing in the SME market and we intend that the Bank of Scotland will be a very strong competitive force in Scotland.”

HBOS was formed by the 2001 merger of Bank of Scotland and Halifax. This 2001 deal saw Halifax directors take both the chairman and chief executive posts in the enlarged HBOS.

Kane said the “risk culture and approach to risk” which Lloyds found at HBOS was not in line with expectations. He also hammered home differences in the decision-making processes at Lloyds TSB and HBOS.

He said: “We would not have handled decisions that way.”

Kane said the problems in the corporate lending arm of HBOS had been known about before the takeover, but the “steep and rapid” economic decline had not been anticipated fully.

He said: “That was the one thing we underestimated, but we were not alone in that view.”

Lloyds Banking Group employs more than 20,000 people in Scotland, and had announced about 1000 job losses north of the Border since the takeover, Kane told MSPs.

Kane said the overwhelming backing of shareholders for the £13.5bn rights issue, at an extraordinary meeting in Birmingham last week, showed financial markets had confidence in Lloyds.

However, he conceded: “We in the banking world have to learn from what happened recently.

“I understand that not everyone agrees with the merger of Lloyds and HBOS but I believe the new enlarged group will deliver long-term value for our shareholders.”

Lloyds Banking Group’s board was lambasted by some shareholders over the HBOS deal at last week’s meeting in Birmingham.

In August, Lloyds Banking Group announced a £13.4bn “impairment” or bad debt charge for the six months to June 30 .

About 80% of this related to what Lloyds Banking Group described as “HBOS legacy assets”.

This massive bad-debt charge pushed Lloyds Banking Group to a pre-tax loss of £4bn for the first half of this year.

Lloyds Banking Group suffered a 32.5% plunge in its share price on February 13 this year when it revealed that HBOS would make a loss of about £10.9bn for 2008.

This loss arose largely from a hike in impairment charges in the HBOS corporate division – a unit which grew out of the Bank of Scotland side of the 2001 merger with Halifax – to £7bn, and a rise in losses from financial “market dislocation” to £4bn.