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November 27, 2009

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Darling backs bank's decision on loan secrecy

THE British government has defended a decision by the Bank of England to keep secret for a year the multibillion pound loans made to keep two major United Kingdom banks from collapse at the height of the financial crisis.

Revelations that the central bank loaned the Royal Bank of Scotland Plc and HBOS Plc a total of 61.6 billion pounds (US$101.8 billion) prompted such a furore - one newspaper pointed out that the sum was bigger than the annual budget for schools - that Treasury chief Alistair Darling made an emergency statement on the issue to Parliament on Wednesday.

Darling said any deliberate disclosure or leak about the loans - made in October and November last year, when the financial system froze in panic in the wake of the bankruptcy of Lehman Brothers - would have jeopardized the economy's stability.

"It is essential that the Bank of England has the power to lend to individuals facing such liquidity problems, it's important too that the Bank of England can do so effectively," Darling said. "Inevitably, on occasion this means that the bank has to be able to do so without disclosing its operations."

Darling added: "Disclosure of individual operations could lead to loss of confidence and exacerbate any short-term liquidity problems."

He pointed to the case of Northern Rock, which experienced Britain's first bank run in more than a century after its short-term funding problems were made public.

The loans were made around the same time as a public 37 billion pound direct bailout of RBS and the yet-to-be-merged HBOS and Lloyds Banking Group Plc.


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