UK government defends secret bank loans

British government defends secrecy surrounding multibillion bank loans

AP - The Bank of England is seen in central London, Wednesday Nov. 25, 2009. Britain's treasury minister Paul Myners ...

LONDON (AP) -- The British government has defended a decision by the Bank of England to keep secret for a year the multibillion pound loans made to keep two major U.K. banks from collapse at the height of the financial crisis.

Revelations that the central bank loaned the Royal Bank of Scotland PLC and HBOS PLC a total of 61.6 billion pounds ($101.8 billion) prompted such a furore -- the widely read Sun newspaper pointed out that the sum was bigger than the annual budget for schools -- that Treasury chief Alistair Darling made an emergency statement on the issue to Parliament on Wednesday.

Darling told lawmakers that any deliberate disclosure or leak about the loans -- made in October and November last year, when the financial system froze in panic in the wake of the bankruptcy of Lehman Brothers -- would have jeopardized the economy's stability.

"It is essential that the Bank of England has the power to lend to inviduals facing such ... liquidity problems, it's important too that the Bank of England can do so effectively," Darling said. "Inevitably, on occasion this means that the bank has to be able to do so without disclosing its operations."

"Disclosure of individual operations could lead to loss of confidence and exacerbate any short term liquidity problems," Darling added. He pointed to the case of mortgage lender Northern Rock, which experienced Britain's first bank run in more than a century after its short-term funding problems were made public.

The loans were made around the same time as a public 37 billion pound ($63 billion) direct bailout of RBS and the yet-to-be-merged HBOS and Lloyds Banking Group PLC, which gave the government significant stakes in each.

Darling said that he stood by Bank of England Governor Mervyn King's decision not to reveal the loans until Tuesday. The central bank said it had carefully considered the public interest case for disclosure but decided that the assistance should only be revealed when "the need for secrecy has ceased." Both banks paid back the loans by January.

Treasury minister Paul Myners stressed that the European Central Bank and the U.S. Federal Reserve had carried out similar covert operations.

George Osborne, the main opposition Conservative Party's Treasury spokesman, said it was important that the central bank be allowed to carry out its function as lender of last resort efficiently.

But he added that it "raises the question of how...these banks came so close to collapse in the first place."

Obsorne also used the revelations to push the Conservatives' point ahead of next year's general election that the Bank of England should be given more powers to assess the health of banks, powers currently held by market regulators.

Vince Cable, the spokesman for the Liberal Democrats, the third major party in Parliament, said that the loan to HBOS was "particularly concerning" as it was made at the same time that the government was convincing Lloyds Banking Group PLC to rescue the bank.

"The Chancellor knew he was selling Lloyds a lemon but he did it anyway to save his own skin," he said. "The Government only wanted HBOS to be taken over so that it didn't have to fully nationalise another bank."

Prime Minister Gordon Brown's spokesman Simon Lewis said Wednesday it wasn't clear whether Brown had been notified at the time.

But Lewis added that, even if Brown had been aware, the information would not have influenced the government's decision to sanction the takeover.

Lloyds, now 43 percent owned by the taxpayer, has since shunned a state-sponsored asset protection program. It this week instead launched Britain's biggest ever rights issue to raise funds, calling on long-suffering shareholders to answer a 13.5 billion pound ($22.3 billion) cash call.

RBS, meanwhile, will end up being 84 percent owned by the government after it puts its risky loans up for insurance under the so-called Asset Protection Scheme.