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Bank loaned £60 billion to RBS, HBOS

LONDON (Reuters) - The Bank of England disclosed on Tuesday that it provided almost 62 billion pounds in emergency loans to Royal Bank of Scotland RBS.L and HBOS LLOY.L at the height of the credit crisis last year.

A Royal Bank of Scotland flag flies over a building in the City of London November 2, 2009. REUTERS/Andrew Winning

The Bank said it did not give details of the loans in its annual report published in May because of fears of the impact on confidence in the banking system.

It said it now felt there was no longer any need for secrecy, with the two banks on a sounder financial footing.

“This was a dire emergency,” Bank deputy governor Paul Tucker told Parliament’s Treasury committee.

“It would also be a great mistake to think that a lender of last resort was waving away all the problems. It has to be a bridge to a fundamental solution. In this case the fundamental solution was state control,” he added.

HBOS is now part of Lloyds Banking Group LLOY.L after a takeover brokered by the British government, while the government stake in RBS is rising to 84 percent after the latest cash injection.

HBOS shareholders would have been unaware of the Bank loan when they backed the takeover by Lloyds last December. The government said senior management at Lloyds knew about the loan.

“The board of Lloyds bank was fully in the picture,” financial services minister Paul Myners told the BBC. “They knew exactly how much support HBOS was receiving, as did their advisers and their legal advisers, and they concluded that it still made a considerable amount of sense for Lloyds and HBOS to merge.”

Lloyds is now tapping shareholders including the government for 13.5 billion pounds in the world’s largest rights issue in order to avoid costly state support.

COLLATERAL

“In exceptional circumstances, as part of its central banking functions, the Bank acts as ‘lender of last resort’ to financial institutions in difficulty in order to prevent a loss of confidence spreading through the financial system as a whole,” the Bank said in a statement to the committee.

“Accordingly, the Bank extended Emergency Liquidity Assistance (ELA) to two institutions, RBS and HBOS, in the Autumn of 2008.”

The banks provided collateral in the form of residential mortgages, personal and commercial loans, and UK government-issued debt with a total value in excess of 100 billion pounds. They have both repaid the emergency loans.

Total use of ELA across both banks peaked at 61.6 billion pounds on October 17, 2008. Use of the facilities peaked at 36.6 billion pounds for RBS on October 17 and at 25.4 billion pounds for HBOS on November 13.

“This is a powerful reminder of how close the banking system came to near collapse,” Prime Minister Gordon Brown’s spokesman told reporters.

Chancellor Alistair Darling confirmed that the Treasury had authorised the loans.

“This indemnified the Bank on a net basis against losses that it might suffer or incur in connection with the Bank’s commitment to ensure that the banking system had sufficient access to liquidity,” Darling said in a letter to the head of the Treasury Select Committee.

The RBS facility was repaid by December 16, 2008, and the HBOS facility by January 16, 2009.

Reporting by David Milliken, Adrian Croft and Kylie MacLellan; Editing by Leslie Adler

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