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Treasury vetoed fund raisings by Lloyds and RBS

The Treasury intervened to prevent the Financial Policy Committee from instructing Royal Bank of Scotland and Lloyds to raise new equity capital, it emerged in public testimony from a member of the committee yesterday. The revelation is likely to fuel the debate about the political independence of the FPC.

Andy Haldane, the Bank of England's executive director for financial stability, told the Treasury Select Committee that the Government had vetoed proposals for the two partially state-owned banks to raise new equity, whether from the public purse or from "private sources".

"It did impose something of a constraint on the avenues that might be used to raise capital," Mr Haldane told the Treasury committee. "It was made very clear to us that [equity] was not to come from government, or indeed from private-sector sources, and therefore those shortfalls needed to be made good by asset disposals."

RBS and Lloyds surprised the City last month when they announced they would not be issuing fresh equity capital to meet their share of a sector-wide £25bn capital hole identified by the FPC in March. The announcement was interpreted as a sign that the two banks had prevailed in a battle with the regulator over their capital levels and that the FPC had in effect backed down. But Mr Haldane's testimony suggests that such a rights issue was never on the cards, thanks to the intervention of the Treasury.

In his written testimony to the Treasury committee, Mr Haldane said the FPC had been "not entirely" free from political interference on the question of RBS and Lloyds' capital levels, although he added this was "understandable" given the Government's stake in the two banks.

The Treasury committee has announced an inquiry into the independence of the FPC. A Treasury official sits on the FPC, but does not vote.

Mr Haldane also wrote in his statement that the FPC mishandled its early instructions for banks to raise more capital. He said the regulator's recommendations in 2011 that banks should act to boost their capital buffers "lacked clarity and decisiveness".

Mr Haldane added that "we should have done a much better job of explaining the significance of this package". In March, the interim FPC finally put a figure on the banks' capital shortfall, when it instructed them to increase their equity buffers by an aggregate of £25bn to enable them to cover possible future bad loan write-downs and regulatory fines.