The Bank of England has revealed today that it secretly lent RBS and HBOS a total of Â£62 billion in the form of Emergency Liquidity Assistance at the height of the credit crisis following the collapse of Lehman Brothers in the Autumn of 2008.
The Bank of England acts as the “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 of England added “In most cases, confidence can best be sustained if the Bank’s support 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.”
It is now viewed that since RBS has signed up to the government’s Asset Protection Scheme and Lloyds Banking Group which took over HBOS has embarked on an alternative strategy to raise further capital in a large rights issue “the Bank judges that there is no longer a need for the assistance to remain secret.”
In further comments to the Treasury Select Committee, Mervyn King the governor of the Bank of England has also stressed the need for the government to eliminate the structural budget deficit over the next parliament. Regarding monetary policy, Mervyn King said that over a period of two to three years the Bank of England would expect to tighten monetary policy by both hiking interest rates and selling some of the assets it had purchased under its Quantitative Easing programme. King argued that it’s hard to see how monetary policy could be more stimulatory, however noted that the Monetary Policy Committee would take any action it thought necessary to achieve the 2% inflation target in the medium term.
Taking into account a range of risks, Mervyn King currently expects that the UK economy will grow by 1.5% in 2010 and 3.0% in 2011.
King yet again took the opportunity to reiterate his support for a weak Pound, which should boost UK exports and help rebalance the UK economy.