Newsroom & speeches
25 November 2009
Statement on emergency liquidity assistance
Check against delivery
Mr Speaker, with permission, I would like to make a short statement on the emergency liquidity assistance provided by the Bank of England to the banking system.
One of the functions of Central Banks is to provide emergency liquidity to banks when it is necessary to do so.
“Lender-of-last-resort” facilities have been a feature of the banking system for many years.
Because there will be times when an individual bank or, as we saw last year, several banks find it difficult or impossible to raise the funds they need from the market.
It is therefore essential that the Bank of England has the power to lend to individual banks facing such temporary liquidity problems.
And it is important, too, that the Bank can do so effectively.
Inevitably, on occasion, this means that the Bank has to be able to do so without disclosing its operations.
Disclosure of individual operations could lead to a loss of confidence and exacerbate any short-term liquidity problems.
That is exactly the problem we saw with Northern Rock in September 2007.
It was a problem, that was recognised by the House and by the Treasury Select Committee in its report on Northern Rock – they recognised that some operations needed to be kept confidential.
Early in 2008, we consulted on proposals to facilitate limited disclosure of the provision of emergency liquidity to ensure that such assistance could be made effective.
Following that, the Banking Act 2009 provided an end to automatic disclosure of liquidity assistance by the Bank of England.
This enabled the Bank to decide the most appropriate way in which to make disclosures to the market.
The FSA too has said there may be good reasons for delaying disclosure of emergency liquidity operations.
Mr Speaker, twelve months ago, we faced a situation when the world banking system was on the brink of collapse.
No-one should underestimate the gravity of the situation we faced.
Protecting retail depositors and maintaining financial stability was essential.
That’s why I said, in my statement to the House on 6 October 2008, that the Governor had made it clear that “in these extraordinary market conditions, the Bank of England will take all actions necessary to ensure the banking system had access to sufficient liquidity”.
And that’s what we did.
The Governor’s decision to make emergency liquidity available was quite right, and we supported it.
Mr Speaker, yesterday the Governor of the Bank of England told the Treasury Select Committee that the Bank had extended such emergency liquidity assistance to RBS and HBOS in the autumn of 2008.
He told the Committee that in most cases confidence can be best sustained if the Bank’s support is disclosed only when the conditions have improved to a point where the disclosure itself should not be a cause for disturbance.
However, he said that, as stated in that report, it is the policy of the Bank that such assistance should be disclosed once the Bank considers the need for confidentiality has ceased.
The Governor’s judgement is now that RBS has signed up for the Asset Protection Scheme and Lloyds Banking Group has embarked on its alternative strategy for capital raising, there is no longer a need for the assistance to remain secret and that it is now appropriate to disclose details.
I agree with his judgement.
Mr Speaker, as the Governor said, from 1 October 2008 the Bank provided liquidity to HBOS, and from 7 October to RBS.
Use of the facilities peaked at £36.6bn for RBS on 17 October and £25.4bn for HBOS on 13 November.
Total use of emergency liquidity assistance across both banks peaked at £61.6bn on 17 October.
At this point the two banks provided the Bank with collateral – including residential mortgages, government debt, personal and commercial loans – totalling in excess £100bn.
The banks were charged fees for the use of the facilities.
And the RBS facility was repaid in full by 16 December 2008, the HBOS facility by 16 January 2009.
There has been no cost to the taxpayer.
By this time, the Government’s recapitalisation of the banking system was in place.
That, alongside other action like the Credit Guarantee Scheme, stabilised the banking system.
Mr Speaker, because of the scale of these liquidity operations by the Bank of England compared to the size of its balance sheet, I granted an indemnity in October 2008, to cover for potential losses in respect of further lending.
The indemnity was provided for actions taken by the Bank of England from 14 October 2008 for a period of two months.
In return for this, the Bank of England paid the Treasury a commercial fee totalling £18.9m.
Mr Speaker, in my view, it is essential that the Bank has the discretion to provide emergency liquidity assistance when it judges necessary to do so.
Over the last year we have had to provide extraordinary support in what are extraordinary times.
I have kept the House informed, in numerous statements, and made it clear that we will do whatever it took to stabilise the banking system.
As a result, no savers in UK banks or building societies have lost money.
Inevitably, some of the support had to be provided on a confidential basis – something most people recognise.
The judgement as to when it is the right time to disclose such operations is a fine one, but I support the Governor’s decision to disclose this information yesterday.
And I commend this statement to the House.
Ends
