Secret bank rescue loans are revealed

MPs critical of deal that preceded Lloyds-HBOS merger

By Kelly Macnamara and David Perry

Published:

The Bank of England yesterday revealed it lent Royal Bank of Scotland and HBOS £62billion at the height of the financial crisis.

In its submission to the Treasury select committee the bank said it stepped in as a lender of last resort, weeks after the collapse of Lehman Brothers, to buy time until the UK Government could take action. The bank kept the loans secret until yesterday, when it judged there were no consequences for the financial system.

Bank deputy governor Paul Tucker told MPs the emergency liquidity assistance for RBS and HBOS was necessary to buy time. He said: “This was tough stuff, this was absolutely a classic lender of last resort operation.”

RBS is 84%-owned by the state after last year’s bailout and the bank’s participation in a taxpayer-backed insurance scheme for toxic loans.

HBOS was rescued from nationalisation by Lloyds TSB, but the government took a 43% stake in the group as it pumped in cash amid soaring bad debts.

While support for RBS peaked at £36.6billion on October 17, HBOS borrowed £25.4billion on November 13 when then chairman Dennis Stevenson was appealing to the bank’s shareholders to back the Lloyds deal.

Liberal Democrat Treasury spokesman Vince Cable said the loan to HBOS was concerning as it was made at the same time that the government was convincing Lloyds to rescue the bank.

Caithness, Sutherland and Easter Ross MP John Thurso, a member of the Treasury committee, said Lloyds’ merger talks with HBOS started on September 17 last year and the emergency Bank of England funding for HBOS was on October 1.

“If Lloyds knew about the funding they should have walked away from the deal, and if they did not they and their shareholders have been taken for a ride by the chancellor. Either way, the deal should not have happened and the only sensible course of action is to split HBOS and Lloyds now.”

He said that, without the Lloyds deal, the government would have had to nationalise HBOS and Scotland would have another high-street bank in operation now, albeit state-owned.

Aberdeen North Labour MP Frank Doran said that at the time the government faced the real possibility of the financial system going into meltdown — bank hole-in-the-wall machines being turned off and pay and pension payments ceasing. In the event the banking system was saved — to the benefit of Lloyds shareholders and everyone else.

SNP Treasury spokesman Stewart Hosie MP has called for much more openness about what went on when the merger was pushed through. He questioned what HBOS and Lloyds shareholders, or even senior management, know about it.