Revelations of secret support do little to shore up confidence

Published on Tuesday 24 November 2009 21:12

EVEN in an era where big numbers have lost their power to shock, the £61billion of clandestine support for Royal Bank of Scotland and HBOS will cause consternation. It is only now that Bank of England Governor Mervyn King chose to let fall this number to the Treasury select committee yesterday.

This was the amount of previously unrevealed support – 36.6bn to RBS between early October and December last year, and 25.4bn to HBOS between October 2008 and 16 January this year – that was being provided on top of taxpayer bail-outs. The revelation underscores

the severity of the seizure of wholesale money markets and how

desperately dependent these banks wereonsuch emergency life support to

forestall a massive failure.

As with many statements made by the Bank's Governor since the onset of this crisis, it begs searching questions. What other support was provided on such a clandestine basis? Were the shareholders of Lloyds misled as to the real condition of HBOS when they were asked to give their approval to a take-over? Why is it only now that this figure has been made public? And what does this say about the earnest pledges of greater transparency now promised in the world of banking supervision?

This emergency funding was paid back in January. But let us be clear on one point. There can be no return of full confidence to Britain's banking system while disclosures such as this keep popping out. Mr King may have released this figure to bolster his running argument with the government. This is that banks, rather than being rammed together in emergency "rescue" schemes promoted and waived through by the Prime Minister and his colleagues, should be broken up and never again be allowed to grow to such a size that they become "too big to fail". This is when they can hold a weapon of financial mass destruction above the government of the day and receive any amount of bail-out support.

The bank's argument for secrecy is that disclosing the loans would have caused greater disturbance to the wider system. This is a fair point. Indeed, it was the leaking of news that Northern Rock had sought similar assistance the previous year that triggered queues outside its branches and drove that bank into the arms of the government. The one grain of comfort now is that the Governor feels conditions have sufficiently improved to allow the true extent of the crisis to be made known.

However, the 800,000 shareholders of Lloyds Bank are likely to take a different view. They were asked by their then chairman Sir Victor Blank and chief executive Eric Daniels, still in this post, to give their support for the takeover of HBOS on 19 November last year – right in the middle of this clandestine funding. Had they known about it, and the extent of it, they may well have viewed the acquisition of HBOS in an altogether different light. As it is, questions about the size and structure of our banks will be fuelled, not assuaged, by this latest revelation.