Emergency loans to RBS and HBOS hit £61.6bn

24 November 2009 | By Natalie Thomas

Speaking at a Treasury Select Committee meeting today about the November Inflation Report, King says these loans were short-term liquidity loans and were paid back in full in January 2009.

He says banks should be expected to make mistakes, but these mistakes should not be of the scale which means the government needs to bail them out.

He says: “In exceptional circumstances, as part of its central banking functions, the Bank acts as ‘lender of last resort’ to financial institutions in difficulty in order to prevent a loss of confidence spreading through the financial system as a whole. Accordingly, the Bank extended Emergency Liquidity Assistance to two institutions, RBS and HBOS, in the Autumn of 2008.”

He says in most cases, confidence can best be sustained if the Bank’s support 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.

King says: “Having carefully weighed the public interest case for disclosure against the potential systemic consequences, the Bank decided to use its powers to limit the extent of disclosure in its financial statements in the 2009 Annual Report. However, as stated in the Bank’s Annual Report 2009, it is the policy of the Bank that such assistance should be disclosed once the Bank considers that the need for secrecy has ceased.”

He says while it is not for him to say what banks should do, the incentives for banks at the moment are to balance their books, and that is driving the restrictive supply of credit.

King says regulators have to be tough on banks which should not blind themselves by the awkward truth.

He says: “We cannot end up with a situation where any regulator feels or any government feels that any institution is too important or too big to fail. That has to be the single most important objective now.”

King also revealed that he expects inflation is likely to rise sharply in the coming months, from its current level of 1.5% to above the target, reflecting an increase in petrol price inflation and the prospective reversal of last year’s cut in VAT.

He says: “Powerful forces are continuing to restrain spending in the economy. Banks are actively trying to reduce their leverage. There is a long way to go in that process, and whilst it is continuing, the availability of credit to households and companies will be impaired.”

Adam Posen, a member of the Monetary Policy Committee says the bank is coming to an end of the large-scale quantitative easing programme.

But says there is genuine uncertainty over the success of QE and the Treasury should have a contingency plan in place.

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