(Adds details from report)
By Sumeet Desai and Steve Slater
LONDON Jan 30 Britain could provide emergency
loans in secret to ailing banks under a proposed law that would
give the authorities more power to intervene to prevent another
Northern Rock-style crisis.
The government on Wednesday launched a 12-week consultation
on improving the framework to preserve financial stability and
protect depositors should a bank fail.
The proposals include allowing a bank to keep emergency
loans secret for a short period, in contrast to Northern Rock
NRK.L, whose announcement that it had needed emergency funding
prompted the first run on the deposits of a UK bank for over 140
years as savers panicked.
"ELA (emergency liquidity assistance) may be a very
short-term solution for a solvent bank and immediate disclosure
could, by leading to a loss of consumer confidence, exacerbate
any liquidity problems," the consultation document said.
"In these circumstances, there may be strong arguments for
delaying disclosure until the temporary problems have passed."
The document also said in the event of an institution
getting into trouble, triggering a special resolution regime,
the authorities would have the power to appoint a restructuring
officer in exchange for emergency support.
The proposals in large part follow measures set out by a
parliamentary committee over the weekend, although they fall
short of creating a new financial stability job at the Bank of
However, the central bank's remit in ensuring the stability
of the financial system would be formalised to ensure this
aspect of its work is beefed up.
Britain's regulators have come under fire over the crisis
that engulfed Northern Rock in September, after it was unable to
raise funds in financial markets and forced to borrow about 26
billion pounds ($51.8 billion) from the Bank of England.
The consultation envisages that the Treasury will remain in
charge of the overall framework of regulatory arrangements, the
Bank of England of monetary policy and financial stability and
the Financial Services Authority of supervision.
The Chancellor of the Exchequer or finance minister will
remain ultimately responsible.
The Treasury is also consulting on how it can better protect
deposits. Currently, only up to 35,000 pounds are guaranteed but
the government may raise that limit and ensure compensation is
paid to savers within a week of a bank being closed.
This could be achieved by allowing the Financial Services
Compensation Scheme (FSCS) -- which oversees the system -- to
immediately borrow from the Bank of England, or by forcing banks
to pay into an insurance scheme in advance of a problem.
The current scheme is essentially financed after the event,
unlike a deposit guarantee in the United States.
An element of "pre-funding" could be introduced "to allow
the FSCS to build up a reserve fund over a period of years", the
consultation document said.
But the major banks are opposed to the suggestion, which
analysts at UBS estimate could cost UK banks almost 3 billion
pounds a year for several years.
"The worry for the industry is that we have a pre-paid
deposit protection scheme ... it would cost an awful lot of
money when banks are not flush with cash. In the end savers
would pay in the form of lower interest rates," one banking
industry source said.