LONDON — Chancellor Alistair Darling on Wednesday defended his decision to allow the Bank of England to secretly lend nearly 62 billion pounds to Royal Bank of Scotland and HBOS last year.
The central bank discreetly provided nearly 62 billion pounds to Royal Bank of Scotland and HBOS at the height of the financial crisis and amid fears of a crash of confidence in the international banking system.
Details now emerging of the situation at the time of the loans also reveal how close the system was to disaster.
The BoE had revealed on Tuesday that it had lent a total of 61.6 billion pounds to the two groups in great secrecy, but also said that the cash had since been fully repaid.
The central bank had said that it extended the emergency liquidity assistance (ELA) in October 2008 to ailing lenders Royal Bank of Scotland (RBS) and HBOS bank, which is now part of Lloyds Banking Group (LBG).
It revealed the loans in a statement to coincide with the appearance of governor Mervyn King before a powerful parliamentary committee, judging that the news would no longer risk a "potentially systemic disturbance".
Darling argued in a letter to the committee on Wednesday that news of the secret loans would have "seriously" jeopardised the stability of the financial system.
"The bank's assessment at that time was that it was vital that their ELA operations remained confidential, and that any disclosure or leak of the operations would seriously jeopardise the financial stability of the system as a whole," Darling wrote.
"I shared this assessment. I also judged that the risk to public resources was low given the quality of the collateral received by the Bank.
"Having carefully considered the case for disclosure... I decided that the risks associated with any disclosure at that point would not be in the public interest."
The letter was sent on Monday but published on Wednesday by the Treasury.
"As the governor has noted, the Bank no longer considers it necessary for the assistance to remain confidential. I also share that judgement," Darling added.
The BoE revealed on Tuesday that RBS borrowed 36.6 billion pounds on October 17, 2008, and HBOS borrowed 25.4 billion pounds on November 13, 2008.
The groups subsequently repaid the cash in December and January respectively.
Struggling HBOS was bought by rival Lloyds TSB in a government-brokered deal that created Lloyds Banking Group earlier this year.
However, LBG fell under state control as a result of the global financial crisis and is now 43-percent owned by the taxpayer.
Royal Bank of Scotland was also ravaged by the credit crunch and the takeover of Dutch giant ABN Amro at the top of the market in 2007. The state now owns 84 percent of RBS after an enormous bailout.
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