King Says British Banks Got Within Hours of Collapse

By Brian Swint

Sept. 24 (Bloomberg) -- Bank of England Governor Mervyn King said two British banks got within hours of a liquidity shortfall on Oct. 6, 2008, and the day after as the U.K. financial system came to the brink of collapse.

“Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day,” the BBC cited King as saying in an interview to be broadcast later today.

King was referring to Royal Bank of Scotland Group Plc and HBOS Plc, the BBC said. Prime Minister Gordon Brown’s government pledged to invest about 50 billion ($82 billion) pounds in the banking system on Oct. 8, 2008, to save it from meltdown in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy declared that September.

“It was, it is, probably the worst situation, as I say, we faced in peacetime,” Chancellor of the Exchequer Alistair Darling said, according to a press release from the BBC.

The BBC corrected its original release to say that RBS was one of the two banks in trouble, and not Lloyds TSB Group Plc. In the wake of Lehman’s collapse, Lloyds TSB took over HBOS Plc, the nation’s biggest mortgage lender, to form Lloyds Banking Group Plc. An RBS spokesman declined to comment on the story.

The television program, The Love of Money, is the third in a series looking back on the financial crisis. It will be broadcast on BBC Two today at 9 p.m. in the U.K.

Great Depression

Edward Lazear, chairman of George W. Bush’s Council of Economic Advisers at the time, told the program: “We literally thought that we were on the verge of the Great Depression, and looking back I think we probably were.”

King said that allowing the banks to fail would have brought the economy to a halt, the BBC said.

“Individuals would not have had access to the money in that bank,” he was cited as saying. “Their deposits would have been frozen. The accounts would have not been there for salaries to be paid in to, so many people would not have been paid their salary.

“In turn, they wouldn’t have been able to pay bills to businesses so the businesses would have found that their flow of payments would have come to an end,” King said, according to the BBC.

Emergency Meeting

U.K. business minister Shriti Vadera called a meeting of senior bankers on Oct. 7, 2008, to advise the government on the bailout plan.

“We really only knew by probably about 7 o’clock at night that we, that everyone, was going to get through the next day,” David Soanes, a managing director at UBS AG in London, was quoted as saying in the program.

On Oct. 2, 2008, the Irish government guaranteed all deposits and borrowings at six of its biggest banks to assure customers they could withdraw their money and avoid a bank run. The decision rattled other European governments because it encouraged depositors to move their holdings to Ireland.

Irish Finance Minister Brian Lenihan told the BBC that there was no other choice because of the risk of panic.

“We were anxious to avoid that at all costs,” Lenihan was quoted as saying. “The policy options available to us were to immediately nationalize an institution. If we immediately nationalized that institution the risk was that it could lead to a systemic collapse of all the other institutions.”

French Finance Minister Christine Lagarde said the decision was “a bit of a shock,” the BBC said. Darling told the program that “the lesson that you draw here is you can’t do these things on your own.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.