Northern Rock rivals given secret loans

Nov 25 2009 by William Green, The Journal

NORTHERN Rock was the “scapegoat” for the failure of British banks and was denied secret loans extended to its rivals, it was claimed last night.

Newcastle Central MP Jim Cousins spoke out after the Bank of England revealed it lent Royal Bank of Scotland (RBS) and HBOS £61.6bn in a “dire emergency” at the height of the financial crisis.

It stepped in as a lender of last resort just weeks after the collapse of Lehman Brothers to buy time until the Government could take action.

The loans were kept secret until yesterday, when the Bank of England judged the danger of collapse had passed and there were no further consequences for the financial system.

But the extraordinary admission sparked damaging questions about the authorities’ reaction to Northern Rock’s troubles in 2007 – when the North East-based lender was denied secret loans that could have avoided the devastating run on its branches. Bank of England Governor Mervyn King blamed that decision on a European Union (EU) directive when he appeared before the Commons Treasury select committee in September 2007.

“I had still hoped and indeed I pressed strongly for the ability to conduct a covert operation but in the end the strong legal advice among the tripartite authorities was that it could not be done,” he said.

Despite those comments, Deputy Bank Governor Paul Tucker told the same committee yesterday that the emergency support for RBS and HBOS was necessary to buy time.

“This was a dire emergency,” he said.