BoE's King Says Two Major UK Banks Were Near Collapse Last October

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Two major British banks faced a liquidity shortfall last October as the financial system stood on the brink of collapse, Bank of England Governor Mervyn King told BBC on Thursday. The broadcaster is set to air the interview later today as part of BBC Two documentary series The Love Of Money.

"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," King said in the interview to be broadcast at 9pm UK time. Those two major banks were HBOS Plc and the Royal Bank of Scotland, the BBC said in a press release.

Describing the situation, King said, "Individuals would not have had access to the money in that bank. 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." He added, "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."

Further, the BBC cited Chancellor Alistair Darling as saying that "it was, it is probably the worst situation as I say we faced in peacetime." UBS Bank David Soanes was cited as saying in the programme that key players in the City including him were aware only by seven o'clock at night, that they were going to get through to the next day.

The programme also cites Ireland's Finance Minister Brian Lenihan, who at that time announced that his country would guarantee its banks. The Irish banking system was on the verge of collapse. Lenihan did not coordinate the decision with the rest of the Eurozone, but informed his French counterpart just before he went public. French finance minister Christine Lagarde describes the Irish decision as "a bit of a shock" in the programme.

Elsewhere in an interview with the Newcastle Journal on Thursday, King said output has stabilized and there are some signs that growth may start to pick up. "But we shouldn't get too carried away by this. This is clearly very small growth after a very large fall and unemployment has risen so it's a difficult challenge ahead," he cautioned.

Earlier this week, Financial Services Authority Chairman Adair Turner said radical changes are required in the financial sector. Regulators should design radically changed regulations and supervisory approaches, he said in a speech in London. The regulator can impose the rules which will guard against risk, but only the banks themselves can restore public trust, said Turner.

Agreeing with Turner's comments, King said the fundamental question to be asked is why the taxpayer guaranteed funding to banks is being used to finance risky transactions. It will take a long time before the balance sheets of the banks are fully repaired and the ability to provide credit to finance expansion will be returned to normal, he told the Journal.

Two major British banks faced a liquidity shortfall last October as the financial system stood on the brink of collapse, Bank of England Governor Mervyn King told BBC on Thursday. (Market News Provided by RTTNews)