Bank of England reveals secret £61.6bn loans to RBS and HBOS

Bank of England reveals secret £61.6bn loans to RBS and HBOS

The Bank of England provided emergency funding of £61.6 billion to crisis hit banks at the height of the financial crisis last year, governor Mervyn King has revealed.

Giving details for the first time of emergency funding provided to HBOS prior to its takeover by Lloyds, as well as to Royal Bank of Scotland (RBS), King confirmed that the loans were made to the banks last year before being wrapped up in early 2009.

The Bank of England also put out an official statement justifying its decision to keep the loans secret. It said: ‘It is the policy of the Bank that such assistance should be disclosed once the Bank considers that the need for secrecy has ceased.

‘Now that RBS has signed up for the Asset Protection Scheme and Lloyds Banking Group has embarked on its alternative strategy for capital raising, the Bank judges that there is no longer a need for the assistance to remain secret and that it is now appropriate to disclose details relating to the emergency loan arrangement provided to RBS and HBOS last autumn.'

The Bank provided £36.6 billion to RBS between early October and December last year. It also handed HBOS £25.4 billion between 1 October 2008 and 16 January this year, with £61.6 billion at peak lent out, just days before the takeover deal was completed.

The knowledge that the Bank of England was backing HBOS to the hilt may explain why Lloyds chief executive, Eric Daniels, was so confident that the takeover was a 'deal of a lifetime’. Having announced the takeover deal in September last year, HBOS was already receiving emergency support from the Bank when Daniels sold the deal to Lloyds shareholders at the AGM in November.

King added the total dependence of the banking sector on the Bank of England and the taxpayer remained enormous, totalling hundreds of billions of pounds.

King on splitting up the banks

Talking in front of a committee of cross-party MPs this morning, the governor also reiterated his case for splitting up banks to prevent them ever being too big too fail in future. He said: 'Banks have to be subject to the same market discipline as other industries,' stating that if they messed up in future 'they should be allowed to fail.'

He added: 'Regulators have to be tough enough on banks to tell them that if they get too big they need to change their structure, so they are not too big to fail.'

King on UK growth

King said the UK's economic growth would now be sharply lower than it would have been if there had been no crisis, with no return to pre-crisis levels of growth for the foreseeable future.

He said: 'Between 5 -10% of output has been lost because of the crisis, for an indefinite period.'

King on UK deficit and credit rating

The governor also discussed the UK's sprawling financial deficit. He said there needed to be a 'credible' plan for reducing the deficit, and while he conceded any improvement in the public finances would be contingent on an economic recovery, he said plans to reduce debt could still be made using a central projection of the likely path of the economy as a guide.

On the UK's much talked about credit rating, he added: 'I don't think there is any immediate risk to the UK's credit rating,' although he warned that the longer the country went on without a plan to tackle its huge debt, the more likely there could be problems, especially if other countries saw any negative rating action.


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