British regulators disclose terms of emergency aid during panic of 2008

By Edward Harrison of Credit Writedowns

The Financial Times reports that British regulators have now opened up to reveal more of the details surrounding the emergency aid banks received during the most acute periods of stress to date in the financial crisis.  Meanwhile, in the U.S., the Federal Reserve continues to resist providing greater details.

The sum some of Britain’s largest largest banks received was in excess of 60 billion pounds.

The Bank of England extended secret emergency financing to Royal Bank of Scotland and to what was then HBOS during the banking panic last October, indicating the two banks were even closer to collapse than had been thought.

From the beginning of October 2008 when Ireland guaranteed the liabilities of all its banks, HBOS needed life support, with RBS also seeking emergency lending on 8 October.

By mid-month, the emergency liquidity assistance for the two peaked at £61.6bn, indicating that insolvency would have followed had the Bank not acted. The two banks clearly could not meet their obligations.

”This was a dire emergency,” said Paul Tucker, deputy governor of the Bank, giving evidence to the Treasury Select Committee on Tuesday.

The emergency aid came at a time when both banks were already eligible for a variety of measures aimed at providing liquidity to the entire banking sector, suggesting that even those extraordinary measures were not enough to sustain either lender.

The Bank disclosed the aid to the Treasury select committee on Tuesday, noting that the support was of the sort that “is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance”.

The Bank said that, because it was fearful that the disclosure would have damaging consequences if revealed last year, it withheld the information from the financial disclosure in its 2009 annual report.

Both banks had paid back the emergency loans by January 2009 by which time they had received capital injections from taxpayers and had access to government guaranteed funding.

Much more is available here: Bank of England bailed out RBS and HBOS.

This revelation stands in contrast to what is happening in the United States.  One reason the Federal Reserve is under attack has to do with transparency. It has resisted calls to make more known about its own emergency lending. Bloomberg has successfully sued the Federal Reserve under the Freedom of Information Act to learn more. The case is being appealed. 

However, the manner in which the Federal Reserve has acted in concert with the executive branch has also been disconcerting to many. It has long been my feeling that they were risking their independence by their aggressive quasi-fiscal policy actions – which effectively cut the legislative branch out of the process. Congress is angry about this.

In My April article, “The Fake Recovery” I warned:

The stimulus to come from these measures is still in the pipeline and, by the end of this year, will probably add a big kick to the economy. You should note that only the fiscal stimulus required legislative approval. All of the other ’stimulus’ has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government’s claims of wanting to increase transparency ring hollow (see my post on Bloomberg’s suit against the Fed as an example of what is really happening).

I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.

Below are a few other articles I posted chronicling the chatter about Fed independence. Some of this predates the acute post-Lehman phase of the crisis.

So the Paul – DeMint bill to audit the Fed should come as no surprise.  This has been building for quite some time. The two summed up the concerns well in closing a Wall Street Journal Op-Ed:

As strong opponents of government intervention into the economy, we do not want to see Congress directly dictate monetary policy. But while the Fed is involved so heavily in monetary policy and its actions so heavily influence the future of our economy, it is necessary that it be fully transparent. Interventions into the economy on the order of trillions of dollars cannot continue to escape public scrutiny. American taxpayers deserve better.

See also Scare-Mongering Over Fed Oversight Bill and Against the Peoples Outrage, both of which question a recent Andrew Ross Sorkin article on the Paul – Grayson – DeMint Fed Oversight bill.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

One comment

  1. John Kelley

    Please check the line spacing of the text on your blog. Ever since you took your recuperative break from making edits to your book (several weeks ago), the spacing (at least on my browser) is more than an inch between lines of text (doesn’t happen with bold text). This makes the blog less than enjoyable to read. Might be my browser, but it only happens here.


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