HBOS and RBS were on the brink of collapse before bail-out

23 December 2008 / by Rebecca Sargent
The UK banking system, led by RBS and HBOS came to the brink of collapse before the Government announced its bail out plan on October 8 this year, deputy governor of the Bank of England, Sir John Gieve told BBC business editor Robert Preston earlier this week.

According to Sir John and Chancellor Alistair Darling, before Government intervention, the banking system came 'perilously close' to collapse. Following the collapse of Lehman Brothers in America, the UK Government could not risk the same happening with RBS and HBOS in the UK.

As a result, crisis talks were held between the banks, the Bank of England and the Government during the second week in October, as markets remained tight despite the proposed merger between Lloyds TSB and HBOS.

And it was not just HBOS and RBS that were in trouble, according to the Chancellor who told the BBC's Panorama: "I was very clear even before the turbulence of that week that whatever we did, we had to do it for the entire banking system.

"We couldn't get ourselves into a situation where you're simply fixing one problem because the problem was then moved to somebody else and you know we just couldn't allow that to carry on happening."

The resulting bail out was revealed on October 8 after the crisis talks which have been described by RBS chief Fred Goodwin as a "drive-by shooting", as they involved little negotiation.

Since the recapitalisation plan was announced, RBS has used £20billion, which, as a result, means that the tax payer owns a 58 per cent stake in the bank.

HBOS and Lloyds TSB combined are set to get £17billion, £11.5billion of which will go to HBOS.

Despite the Government's capital injection, and arguments that HBOS could survive on its own, Lloyds TSB and HBOS are set to become Lloyds Banking Group by the end of January, giving them 28 per cent of the mortgage market, since both sets of shareholders gave the merger the go ahead, much to the dismay of the Merger Action Group.

Commenting on the future of the UK economy and banking system, Alistair Darling added: "I'm confident we can get through it because I think there are good reasons to be confident. We'll have low interest rates, lower prices, fuel prices will be coming down as oil falls. We've got lower inflation. All those things will help.

"We have to work our way through and critically of course have to make sure we've done a lot in order to ensure the integrity of the banking system but the banking system has got to ensure the integrity of a lot of businesses, to look after the interests of a lot of people."

Hinting at further Government intervention, he added: "We'll play our part but they've got to do a lot as well."

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