Too big to fail? Guerrilla central banking and the last resort

November 25, 2009

ukreuterscomDeciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.

Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.

The Bank said “this was a dire emergency” and Downing Street called the secret lending of taxpayers’ money in the Autumn of 2008 “a powerful reminder of how close the banking system came to near collapse.”

In Westminster, some MPs were flabbergasted, even though the loans have now been repaid.

“It is astonishing that this was kept secret for over a year,” said Vince Cable, finance spokesman for the Liberal Democrats. “The government has treated taxpayers like children while expecting them to foot the bill.”

John McFall, Treasury Committe chairman, said the sum caused “a little bit of an intake of breath thinking how many universities, how many colleges, how many jobs you could support with this.”

“It’s Enought to Make Anyone Feel Queasy,” was Ian King’s headline in The Times. “Any More £62 bn Loans You Haven’t mentioned, Merv?” asked the Daily Mirror, addressing itself to Bank of England Governor Mervyn King.

“In exceptional circumstances … 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,” the Bank said in a statement. Lord Myners, the financial services minister, declined to say whether any other secret loans had been made.

HBOS shareholders would have been unaware of the Bank of England loans when they backed its takeover by Lloyds last December. “Shareholders in Shock after Banking Bombshell,” said one Times healdine. The government said senior management at Lloyds knew about the loan.

“But is it a scandal that the emergency aid was kept under wraps?” asked Andrew Hill in the Financial Times’s Lombard column. “It is not. Picture the catastrophe — financial, social and political — that a press statement would have triggered. Guerrilla central banking has to be a last resort. But this was one clear occasion where a false market was better than no market at all.”

There has been pressure in the higher echelons of the Bank of England to dismantle banks that are too big to fail but in government this so far has had little resonance. But there is concern that these staggering bank bailouts erode the public’s confidence in the free market system by reinforcing the argument that there is one set of rules for the city and another rule for everyone else.

Should the Bank have secretly bailed out HBOS and the Royal Bank of Scotland? Do you believe there was an alternative? Are you concerned about other clandestine banking operations that taxpayers may be unaware of? What do such secret activities say about transparency and accountability in a democractic country?

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I take issue with some of the comments being thrown out today such as “the taxpayer has footed the bill” How so? the money has been repaid and no doubt with something extra on top as i’m pretty sure it’s not free money. the comparrisons with schools , universities , defence are not paralleled as there is no return from sone of these expenditures whereas with a “loan” and loan being the key word here, there is a return of the original investment plus some profit for the tax payer. Imagine what could be done if the government sold their stake in the major banks at a significant profit in the future. There’s exra money in the pot which wouldn’t have otherwise been there to sread downward on education and health and the armed forces. Where will the outcry be then.Individuals are not necessarily stupid but people en masse are. Look at the panic which eventually led to the collapse of Northern rock when it was announced they’d asked for a facility , not even taken , from the Bank of England. Mass hysteria and people queueing to withdraw the lifeblood of the bank for fear of them going under yet they themselves perpetuated the ultimate demise of the bank.Good call by the B of E I say. you can’t trust idiots to make the right decision.

Posted by the enlightened one | Report as abusive