Why the Bank handed out £62bn in secret funds
Politicians are upset they weren’t told – but the secrecy was doubtless prudent
At the height of the financial crisis last year it was considered prudent to stash a few thousands pounds in cash in the mattress in case of a run on the banks. Turns out such fearful thinking wasn't an exaggeration of the impending danger.
The Royal Bank of Scotland and HBOS both came within minutes of closing cash-points and abandoning normal business operations, the Bank of England confirmed yesterday.
As a result, the BoE extended £61.6bn in emergency funds to the two banks in an unprecedented secret deal that has only now come to light. But was the secrecy really necessary?
Yes, says Chancellor Alistair Darling. He shared the assessment that disclosing details of the lending "would seriously jeopardise the financial stability of the system as a whole".
The deal underscores just how gravely ministers and central bankers viewed the potential unravelling of the banking system in September and early October 2008. Authorities had no wish to repeat the Northern Rock crisis when news of emergency lending leaked, customers panicked, withdrew their savings, and the bank collapsed.
John McFall, chairman of the Treasury Select Committee where news of the £61.6bn deal broke yesterday, said: "You cannot underestimate how fraught these times were. Taxpayers have a right to know, but it is a matter of timing... had the loan been disclosed at the time there would have been a run on the banks."
But there's mounting anger at the party political level that Parliament was never informed of the emergency funding and the potential collapse of the two banks even as Darling, Mervyn King and banking chiefs sought a buyer for HBOS.
Lloyds TSB shareholders were not told of the four-month loan - the first instalment of which was paid two months before Lloyds took over HBOS.
"What is particularly concerning is that the Government was pumping billions into HBOS at the exact same time it was convincing Lloyds to take it over," says Liberal Democrat Treasury spokesman Vince Cable yesterday. "The Chancellor knew he was selling Lloyds a lemon, but he did it anyway to save his own skin."
Perhaps. But if the alternative was telling the truth and allowing public panic over two of the UK's largest banks being in trouble - then some deception was certainly the prudent choice.
Lord Myners, the City Minister, defended the Bank's decision to keep the loan quiet. "Parliament gave the Bank of England the right to operate covertly to support the banking system. We now know that the banking system was within a matter of hours of collapse. We are now seeing how true that was." ·
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