Support for banks at risk has cost pounds 115m: Bank of England operation 'succeeded in averting a serious crisis', says Leigh-Pemberton

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A BANK of England liferaft for small banks that have been hit by runs on their deposits over the last two years has so far cost pounds 115m, the Bank's annual report revealed yesterday.

Robin Leigh-Pemberton, the Governor, said the operation was 'successful in averting what could have been a serious and much wider systemic crisis'.

The Bank said its watch list of small banks thought to be at risk - in the wake of the failure of Bank of Credit and Commerce International and several previous failures of smaller banks - totalled 40 institutions. But the number aided in the liferaft was 'a few,' and not all of them have caused losses to the Bank because some have been revived.

The bad-debt provisions were the main reason for a sharp drop in the Bank's operating profits from pounds 166m to pounds 88m in the year to February. The result was a pounds 30m drop in the Bank's dividend to the Treasury, to pounds 38m.

Far from minimising the scale of the problem, as the Bank has done until now, officials made clear they felt the operation had averted what could have been a 'very serious crisis,' threatening many other banks. There was a risk that ultimately it could have spread to much larger and more important institutions.

Those aided are thought to include National Home Loans and City Merchants Bank. The common characteristic was that they obtained a large part of their deposits from the wholesale money markets, where panic can spread fast, rather than high street depositors.

The support is believed to have involved many hundreds of millions of pounds in loans and guarantees.

This is the first time the Bank has confirmed that the operation cost it money. The pounds 115m costs includes pounds 25m from 1991/2 that the Bank charged to its profits last year but kept out of its last annual report because it feared it would alert the markets and increase the panic.

The numbers compare with provisions against the fringe banking crisis of the mid-1970s that cumulatively totalled about pounds 100m by 1980, or roughly pounds 300m in today's money. Two firms rescued then, Slater Walker and EBS Investments, are still on the Bank's books at a value of pounds 17m.

The operation was initially seen as no more than support for the liquidity of the banks in trouble in the wake of BCCI's failure, because they were losing deposits, mainly from local authorities. The Bank believes the serious part of the crisis lasted from mid- 1991 to early last autumn, when tensions eased.

But because the recession continued longer than expected and property values fell further, what began as a cash problem turned into a solvency problem for some of the banks in the liferaft. That forced bad-debt provisions against banks that the rescue operation failed to get out of trouble. They became insolvent, and may not be able to repay all their depositors.

Bank officials played down the fact that the crisis in the banking system ended at much the same time as Britain left the exchange rate mechanism, allowing a rapid lowering of interest rates. The US had already bailed out its own stricken banks with exceptionally low interest rates.

Officials said the cost was all in provisions for future losses, no write-offs had yet been made and some money could be recovered.

The rescue was launched on the Bank's own initiative, using its own money, as well as guarantees to back loans from clearing banks such as NatWest. The Treasury was informed but its permission was not asked because the rescue was within the Bank's own powers as supervisor of the banking system. There was no government guarantee.

The Bank report said that during the crisis it kept '40 small banks under particularly close review'.

A Bank source said: 'This was a very serious test of supervision which we believe was conducted with high professionalism and married with the support operations it averted what could have been a very serious crisis indeed.'

The administrators of Equatorial Bank, the accountants Ernst & Young, will present proposals for the future of the bank at a creditors' meeting on 9 June. They said a review of the bank's accounts showed a surplus of pounds 6.4m but its loan book may require additional provisions, reducing the amount going to creditors.

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