The Bank of England secretly lent £61.6bn to Royal Bank of Scotland and HBOS at the height of the financial crisis to prevent their immediate implosion, it said on Tuesday.
Danger signs: ascreen showing Royal Bank of Scotland's share price movement on October 7 2008, at the height of the financial crisis and the day before the Bank of England stepped in with an emergency loan
In a shock announcement, the Bank disclosed that it had been forced to use its lender of last resort facility last October to "buy time" for RBS and HBOS, which were "effectively... bust". It managed to keep the loans - the equivalent of almost £3,000 for every household in the UK - a complete secret to all but a handful in the City for well over a year.
The loans, which began on 1 October 2008 for HBOS and seven days later for RBS and lasted until January this year, show that even after being effectively semi-nationalised, fellow financial institutions were still refusing to lend the banks money. Like Northern Rock the previous year, they were forced to call on the Bank's assistance, although unlike Northern Rock they did not disclose the support.
Paul Tucker, the Bank's deputy Governor for financial stability, told the Treasury Select Committee: "If we hadn't done it, the cycle would have been a lot worse than it would have been otherwise. This was a classic lender of last resort operation.
"Within months the Government had massive equity stakes. What that's effectively saying is that these institutions were bust... This was a dire emergency."
In exchange for the near £61.6bn support, the Bank demanded £100bn of collateral, underlining the concern it had about the value of both institutions' assets. It also demanded a fee, the scale of which it has not disclosed.
Most remarkable, however, was the fact that the Bank managed to lend such a sum without it being detected by market participants or by the media - although rumours did abound at the time. The Bank used recent changes in the law to limit the detail it published on the support.
Economists said yesterday that whereas the Northern Rock support had been difficult to disguise because of the relative calm in markets, at the time of the RBS and HBOS support the Bank had been swelling its balance sheet with currency swap facilities with the Federal Reserve and European Central Bank.
The loan facilities, of £36.6bn for RBS and £25.4bn for HBOS, were in addition to the hundreds of billions provided to the banking system in the form of guarantees, liquidity support and recapitalisation funds. Through them, the Bank was also quietly injecting cash into the economy some six months before it started quantitative easing.
Economist Tim Congdon said: "It is staggering, but it was the right thing to do. If you're in a system that is prone to panics, the last thing you want is to advertise that an institution is in trouble."
Shadow Chancellor George Osborne said: "The scale of these loans raises the question of how Labour's tripartite regulatory structure allowed these banks to come so close to collapse in the first place, and underlines the need for fundamental reform to put the Bank of England back in charge."
The Telegraph
Bank of England tells of secret £62bn loan to save RBS and HBOS You On Here » Bank of England tells of secret £62bn loan to save RBS and HBOS
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