More than £60bn was secretly lent by the Bank of England to prevent Royal Bank of Scotland and Halifax Bank of Scotland from failing at the height of the financial crisis last year.
In evidence to the Treasury Select Committee, the Bank revealed yesterday that such a catastrophe was averted when it decided "in exceptional circumstances" to act in its traditional role as lender of last resort and extended Emergency Liquidity Assistance (ELA) to RBS and HBOS.
The lifeboat was launched on 1 October 2008 with a loan to HBOS. Six days later the Bank also provided ELA to RBS. Use of the facilities peaked at £36.6bn for RBS on 17 October and at £25.4bn for HBOS on 13 November. Total use of ELA across both banks peaked at £61.6bn on 17 October. The RBS facility was repaid by 16 December and the HBOS facility by 16 January this year.
In return for funding, the banks provided the Bank of England with collateral of more than £100bn, consisting of residential mortgages, personal and commercial loans and gilts, and paid "penalty" fees.
Had the Bank not acted, a run on those banks, similar to the one seen earlier on Northern Rock, and further loss of confidence in the UK's financial sector was almost certain.
That in turn could have frozen the entire UK payments system, cash machines might have refused to dispense banknotes, or simply run out, and panic conditions would have inflicted massive damage.
During tense exchanges between Bank officials and Jim Cousins, a member of the select committee, the Bank's deputy governor, Paul Tucker, defended the decision as the sort of central banking activity that had been undertaken "for more than a century".
The punitive terms applied by the Bank, said Mr Tucker, were because the money was required at such short notice, the Bank had no way of verifying the value of the collateral, and was obliged to protect the Bank, and taxpayers, from financial loss.
Mr Tucker added that such help was only ever considered as "a bridge to something", in this case recapitalisation and substantial state shareholdings. A takeover of HBOS by Lloyds TSB, brokered by the Prime Minister, had been agreed, but not completed, at the time of the rescue.
The Bank said that it had decided to release the information because the Lloyds Group capital raising had clarified the bank's future funding position. "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."
The Bank's support for RBS and others goes much further than has so far been disclosed. The Special Liquidity Scheme has lent around £185bn to unnamed banks and building societies. The SLS is expected to unwind over the next two years, and details are patchy. There is also the Asset Protection Scheme, now confined to RBS, and the Credit Guarantee Scheme. Some reports put current state support for Lloyds Group at £165bn.
The Governor of the Bank, Mervyn King, told MPs that total state support ran into "hundreds of billions" of pounds; in a speech last month he put total state support to the banking system, including equity stakes, at close to £1 trillion.
Mr King also took the opportunity of his appearance before MPs to reiterate his call for the "too big to fail" or "too important to fail" issue to be finally resolved.
Showing some anger at the present situation, Mr King called for a return to market disciplines: "If banks screw it up and make bad decisions they should be allowed to fail."
He implied that the current approach by the Financial Services Authority, to minimise the risk of failure though closer supervision and higher capital, was insufficient. Bankers, declared Mr King, would always make mistakes.
£36.6bn lent to Royal Bank of Scotland.
£25.4bn lent to Halifax Bank of Scotland.