The Bank of England extended secret emergency financing to Royal Bank of Scotland and to what was then HBOS during the banking panic last October, indicating the two banks were even closer to collapse than had been thought.
From the beginning of October 2008 when Ireland guaranteed the liabilities of all its banks, HBOS needed life support, with RBS also seeking emergency lending on 8 October.
By mid-month, the emergency liquidity assistance for the two peaked at £61.6 billion ($102B), indicating that insolvency would have followed had the Bank not acted. The two banks clearly could not meet their obligations.
“This was a dire emergency,” said Paul Tucker, deputy governor of the Bank, giving evidence to the Treasury Select Committee on Tuesday.
The emergency aid came at a time when both banks were already eligible for a variety of measures aimed at providing liquidity to the entire banking sector, suggesting that even those extraordinary measures were not enough to sustain either lender.
The Bank disclosed the aid to the Treasury select committee on Tuesday, noting that the support was of the sort that “is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance”.
The Bank said that, because it was fearful that the disclosure would have damaging consequences if revealed last year, it withheld the information from the financial disclosure in its 2009 annual report.
Both banks had paid back the emergency loans by January 2009 by which time they had received capital injections from taxpayers and had access to government guaranteed funding.
The revelation showed that last year the Bank had resolved the difficulties it faced in keeping the loans to Northern Rock secret in September 2007.
The Bank added that, because RBS had now signed up for its asset protection scheme, in which the government provides insurance against certain losses, and Lloyds Banking Group — which took over HBOS in a controversial government-backed rescue merger — had embarked on a capital raising strategy, it was no longer necessary for the information to be kept from the public.
According to the Bank, use of the facilities peaked at £36.6B($60.6B) for RBS on October 17 last year and at £25.4B ($42B) for HBOS on November 13. At the peak of emergency borrowing the two banks provided the Bank of England with collateral in the form of residential mortgages, personal and commercial loans and UK government debt that was valued at £100B ($165B). It said the banks were also charged fees for use of the facilities.
In addition, both banks had access to the Bank of England’s normal market operations and to other facilities, including the special liquidity scheme under which banks could swap high-quality mortgage-backed securities for government gilts.
From October 13 2008, both banks were eligible to issue securities under the credit guarantee scheme.
Tags: Bank of England, borrowing, collateral, commercial loans, controversial government, emergency financing, government debt, insurance, loans, mortgages, Royal Bank, secret bailout
