A Pint at the Weary Banker

[steepholm]

There seems to have been a lot of shock in the UK that the Bank of England secretly loaned HBOS and RBS almost £62 billion pounds last year. That's understandable; but I seem to remember that when there was a run on Northern Rock back in autumn 2007, it was largely because the Bank of England had given it a "liquidity support facility" (read "loan"), and that it had had to make that public due to rules about transparency that had recently been introduced. At the time, many people complained that it would have been better had they been able to carry out such rescue operations discreetly, without causing panic among investors. According to the Daily Telegraph, for example:

"[Bank of England Governor, Mervyn] King wanted to do a covert deal, providing Northern Rock with emergency funding behind closed doors. He argued that this was the easiest way to save the Rock without spreading panic. But lawyers kept telling him that he could not do this – it would breach the EU's market abuse directive."

So, has that directive now been done away with? And, if it was a bad idea to make it public back then, why is it scandalous to keep it secret now? Colour me confused.

Comments

[mraltariel.livejournal.com]

I completely agree with you. These kinds of interventions have historically been made on the QT by the BoE for precisely the reasons you outline, and it has hitherto worked very well (as in this case).

I think the reason that there might be additional hoo-ha this time is that the loan was made to HBOS to keep it liquid *while the government was pimping HBOS to Lloyds as a going concern*; this ill-starred merger was (once all the facts were in the public domain) clearly doomed, and has, possibly permanently, crippled one of the best of the UK high-street banks. This is a major contributor to our continued recession, when every other developed nation has already come out of theirs.

I still think that the loan should have been made in secret; the more interesting question is whether it was disclosed to the Lloyds people before they agreed to the merger. You'd hope so, but I doubt proper due diligence procedures were carried out in the febrile atmosphere in which the transaction was executed.

[steepholm.livejournal.com]

Thanks - those thoughts are very helpful.