Bail-out 'stopped RBS and HBOS collapsing'

Published on Tuesday 23 December 2008 09:08

THE taxpayer-funded bail-out saved both the Royal Bank of Scotland and Halifax Bank of Scotland from collapse, it has been reported.

An investigation into the multi-billion pound bail-out by the BBC's Panorama team revealed that both banks were on the brink of going under in the second week of October.

The deal was described by then RBS chairman Sir Fred Goodwin as more like "a drive-by shooting" than a negotiation, it has been reported.

Both RBS and HBOS, two of Scotland biggest financial institutions and among the largest employers in Edinburgh, were reportedly struggling to get short-term funding for their operations due to the pressure being put on banks by the credit crunch.

Without this funding, which is easy to access in non-crisis times, the banks would have almost certainly collapsed, authorities believed.

Crisis talks with the Government led to the Treasury and the Bank of England providing banks with 350bn in loans and guarantees. This acted to stabilise the banking system and prevented HBOS and RBS from collapsing.

Speaking on the programme, Sir John Gieve, the deputy governor of the Bank of England, said: "It became increasingly obvious that something more comprehensive was going to be needed because confidence was draining out of the system.

"Although banks could cover their balance sheets, they were having to rely more and more on overnight funding so you got this snowballing effect of overnight funding which of course is highly vulnerable to a shock. There was very little time. The Government was announcing the terms on which it was prepared to come in and the banks had to think about it but they broadly had to accept it."

Sir John admitted that former RBS boss Sir Fred Goodwin, who left his role as chief executive earlier this month, had said "you know it's more a drive-by shooting than a negotiation".

Under the bail-out, RBS received 20bn of taxpayers' money, meaning the bank is now 58 per cent public owned.

After shareholders from both banks agreed a controversial take-over deal, HBOS and Lloyds TSB are set to get 17bn, with the largest part of the sum going into HBOS. Taxpayers are likely to receive a stake of more than 40 per cent in the newly-formed superbank as a result.

On the Panorama report, screened last night, Chancellor Alistair Darling admitted that the entire banking system had needed to be rescued in October.

"We couldn't get ourselves into a situation where you're simply fixing one problem because the problem was then moved to somebody else and you know we just couldn't allow that to carry on happening," he said.

"Things did get worse during that week because confidence was just draining out of the system.'"