Darling defends secret loans to keep HBOS and RBS afloat

Chancellor says loans had to be kept confidential to prevent a run on the banks

Alistair Darling yesterday defended the £62bn lent to HBOS and RBS to prevent the nightmare scenario of their collapse at the height of last year's financial crisis yesterday.

In an emergency statement to the House of Commons, the Chancellor said: "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."

He also defended the decision to keep the emergency financing secret, pointing to the disastrous consequences of the publicity following Northern Rock's call on Bank of England funds that sparked a run on the bank and led to its enforced nationalisation.

"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."

Earlier in the day, the City minister Lord Myners insisted that Lloyds shareholders had been kept "fully in the picture" about the HBOS loan, advanced on 1 October last year, as they weighed up the bank's shotgun wedding with the rival bank, which many felt saved the latter from collapse. A deal had been agreed, but not completed, at the time of the loan. The consequence of the merger was a taxpayer-funded bailout of the expanded Lloyds Banking Group. Both banks had repaid the loans by January 2009.

Responding to the statement, the shadow Chancellor, George Osborne, said he supported the loans. But he added: "The sheer scale of these loans – more than the entire schools budget – raises the question of how these two banks were allowed to pursue funding models that left them so close to collapse in the first place. Doesn't this illustrate yet again the total failure of the tripartite system of regulation created by this Government?

"And doesn't it underline the need for fundamental reform to put the Bank of England back in charge of banking supervision."

Vince Cable, the Liberal Democrat shadow Chancellor, also said he supported the principle of the loans, but was unhappy at the length of time taken to make them public.

The existence of the loans only emerged on Tuesday when they were revealed by Mervyn King, Governor of the Bank of England, at a hearing of the Treasury Select Committee. Mr King has said the Government must resolve the problem of some banks being seen as "too big to fail".