Log In

Reset Password

Govt. defends secret $62b emergency loans to banks

LONDON (Reuters) - The British government defended its central bank's right to make secret loans to struggling financial institutions after the disclosure that two of them received almost £62 billion ($104 billion) last year.

"I remain of the view that the Bank of England must be allowed to provide assistance to financial institutions on a confidential basis as financial stability may require," finance minister Alistair Darling said in a statement yesterday.

The BoE said on Tuesday it had provided £61.6 billion ($102 billion) of emergency loans to Royal Bank of Scotland and HBOS at the height of the credit crisis last year.

The BoE had not detailed the loans before for fear of their impact on the stability of the banking system. They have since been repaid.

Darling noted changes to the law on confidentiality had prevented a repeat of the Northern Rock crisis of September 2007 when account holders rushed to withdraw their cash after hearing that the Bank of England had stepped in to provide support.

"Twelve months ago, we faced a situation when the world banking system was on the brink of collapse. No one should underestimate the gravity of the situation we then faced," he told Parliament. Darling said the banking system was now more stable and that no British savers had lost money during the credit crisis that followed the collapse of US investment bank Lehman Brothers.

The government has a 43 percent stake in HBOS parent Lloyds Banking Group and controls 84 percent of RBS after bailing out the banks.

Prime Minister Gordon Brown's spokesman said Brown was aware of the loans and that HBOS and RBS had made the appropriate level of disclosure.

"He and the chancellor (Darling) were obviously aware of this. It was a very big sum of money and it was a very important decision made by the Bank of England under the auspices of being the lender of last resort," the spokesman said.

However, the secrecy means that shareholders were unaware of details of the loans when asked to approve the government-brokered takeover of HBOS by Lloyds late last year. The loan to HBOS peaked at £25.4 billion in November 2008.

Darling noted that merger documentation referred to HBOS having access to liquidity offered by the central bank.

"The directors of Lloyds were told by the Bank of England of the nature of the extent of these operations so that they knew them at the time," he said.

The BoE had not detailed the loans before for fear of their impact on the stability of the banking system. They have since been repaid.

Darling noted changes to the law on confidentiality had prevented a repeat of the Northern Rock crisis of September 2007 when account holders rushed to withdraw their cash after hearing that the Bank of England had stepped in to provide support.