United Kingdom: HBOS and RBS Emergency Liquidity Program, 2008

According to the report by Ian Plenderleith, the retired BoE official who conducted a review of the BoE emergency liquidity provision during the GFC, emergency liquidity assistance activation required three core criteria: (a) the banks’ potential failures posed financial stability threats, (b) the banks receiving liquidity support “should in a broad sense be solvent,” and (c) the banks should have a feasible exit strategy from the lending—in other words, the liquidity facilities were supposed to be a “temporary bridge to a stable state” where the receiving banks could repay their assistance to the BoE (see Key Design Decision No. 2, Part of a Package) (Plenderleith 2012, 8).

The BoE provided emergency liquidity facilities to HBOS and RBS in the form of collateral swaps. Both banks received sterling liquidity lines, which allowed them to swap illiquid assets for UK Treasury bills. RBS also received a US dollar liquidity line, which allowed it to receive US dollars in return for UK Treasury bills that it sourced from the sterling liquidity line or a similar broad-based program (Plenderleith 2012).

HBOS announced a merger with Lloyds on September 18, 2008, which seemed to provide temporary stability in funding, but the run resumed over the following weeks (BoE 2015). The purpose of the HBOS facility was to ensure the bank had sufficient liquidity until a new funding plan could be devised and the bank could complete its government-supported merger with Lloyds TSB. The RBS liquidity facilities were meant to provide bridge funding to the point where RBS could use the government recapitalization scheme (House of Commons 2009; Plenderleith 2012).

The BoE granted sterling facilities to HBOS on October 1, 2008, and to RBS on October 10 (Plenderleith 2012). A BoE report, “The Failure of HBOS Plc (HBOS),” defines HBOS’s receipt of the emergency liquidity as its point of failure “since without that measure the bank would not have been able to continue trading” (BoE 2015).

The sterling facilities were structured as collateral swaps where the BoE provided HBOS and RBS with sterling-denominated UK Treasury bills that the central bank had borrowed from HM Treasury’s Debt Management Office (DMO),^FThe DMO’s responsibilities include issuing gilts, managing government cash flows, and lending to local authorities (DMO 2005). with the banks providing collateral in the form of pools of mortgages and loans that were in the process of being securitized (DMO 2005; Plenderleith 2012).

The BoE gave RBS the US dollar liquidity line on October 7 (Plenderleith 2012). In the US, RBS was a major provider of corporate finance and debt capital markets services across the country and was the 10th-largest commercial bank by deposits as of September 2008 (EC 2009c). The FSA said that October 7, 2008, was the point of failure for RBS. RBS would have gone into resolution if it had not received emergency liquidity assistance from the BoE and capital support from HM Treasury (see Key Design Decision No. 2, Part of a Package) (FSA 2011).

The RBS facility used the same terms and same legal agreement as the BoE’s market-wide US dollar repurchase agreement (repo) operations but allowed RBS to access more liquidity than the market-wide operations. Starting October 15, with first settlement on October 17, the market-wide US dollar repo operations offered repos at fixed rates and for unlimited amounts. The repos were previously for limited amounts, roughly up to only USD 8 billion per bank (BoE 2008a; Plenderleith 2012). The switch helped enable RBS to repay its bilateral US dollar liquidity as the bank could receive the full amount of US dollar liquidity that it required through the market-wide facilities. The size and duration of RBS’s dollar liquidity usage was much lower than its usage of the sterling facilities (see Figure 3) (Plenderleith 2012).

Source: Plenderleith 2012.

According to the BoE’s review of the programs, the BoE generally aims to find a private sector solution for ailing banks when possible. In April 2008, the BoE had considered using the approach of providing loss protection to private lenders for HBOS but decided it was not likely to succeed. By late 2008, the BoE judged that neither a uniquely private solution nor an approach like the government-guaranteed lending from a consortium of banks would be feasible for banks as large as HBOS and RBS. HBOS’s merger with Lloyds TSB required government capital (Plenderleith 2012).

Extended use of the Special Liquidity Scheme—the broad-based collateral swap facility—was another alternative to the ad hoc emergency facilities specifically for HBOS and RBS. However, the SLS was a three-year term facility, which was incompatible with the desire to provide short-term bridge financing. Additionally, neither bank had adequate collateral to access liquidity in the quantities they needed. HBOS had mortgage collateral that could be eligible if securitized, but the bank had not had time to complete the securitization process (Plenderleith 2012).

The BoE provided emergency liquidity facilities to fund HBOS and RBS until the respective banks could recapitalize (House of Commons 2009; Plenderleith 2012). RBS made its final repayment on the facilities on December 16, 2008, two weeks after its first government capital injection, and HBOS made its final repayment on January 16, 2009, one day after its capital injection (EC 2009b; HBOS 2010; Plenderleith 2012).

Bank Recapitalization Scheme

On October 6, 2008, then–BoE Governor Mervyn King announced a major recapitalization program of at least GBP 50 billion, which he situated alongside the package of other support measures comprising the broad-based guarantee and liquidity schemes (BoE 2008c). The UK Parliament passed the broad-based Bank Recapitalization Scheme, and the European Commission (EC) approved it the next day, on October 13. The Bank Recapitalization Scheme made available new Tier 1 capital for banks and building societies so that they could strengthen their balance sheets through recapitalization (EC 2008; EC 2009b). Both HBOS and RBS took part in the Bank Recapitalization Scheme (Buchholtz 2021).

On October 13, 2008, RBS announced its recapitalization, which was completed on December 1, 2008: HM Treasury injected GBP 15 billion of ordinary shares (58% stake in RBS) and GBP 5 billion in preference shares. After further losses by RBS, shares on January 19, 2009, HM Treasury announced its intention to convert preference shares into ordinary shares, thus achieving a 70% stake in RBS (EC 2009b; HMT 2009). In the same press release, HM Treasury also said that it would also increase lending by GBP 6 billion in the next 12 months (HMT 2009). On November 3, 2009, HM Treasury announced another recapitalization of GBP 25.5 billion and a five–year contingent commitment to subscribe GBP 8 billion of B shares should RBS’s core Tier 1 capital ratio fall below 5%. In total, HM Treasury injected GBP 45.5 billion (GBP 53.5 billion with contingent capital) in RBS (EC 2009b). HM Treasury has reduced its stake in RBS from 58% to 38% for GBP 5.8 billion from August 2015 to the writing of this case study; HM Treasury also received a dividend payment of GBP 1.2 billion in March 2016 (AP 2022; HMT 2016; NAO 2017; NatWest n.d.). As of July 22, 2020, RBS is known as NatWest Group plc (AP 2022; RBS 2020).

HM Treasury announced its intention to recapitalize HBOS in October 2008, and the transaction was completed at the time of Lloyds TSB’s acquisition of HBOS in January 2009 (EC 2009a; HBOS 2010). To this end, HM Treasury injected GBP 8.5 billion in ordinary shares and GBP 3 billion in preference shares into HBOS on January 15, 2009 (HBOS 2010).

Credit Guarantee Scheme

On October 8, HM Treasury announced the broad-based Credit Guarantee Scheme, which took effect on October 13, 2008: Participating financial institutions could pay a risk-based fee and issue debt up to three years, guaranteed by HM Treasury (HMT n.d.; McNamara 2020). For more on the Credit Guarantee Scheme, see McNamara (2020).

According to the EC’s December 2009 State Aid decision, RBS was “a significant user of the Credit Guarantee Scheme,” but the amount of debt that RBS issued under the scheme was redacted (EC 2009b, 11). RBS completed its final repayment under the scheme in May 2012 (EC 2014).

Both HBOS and RBS repaid the sterling liquidity assistance partly from debt issuance under the Credit Guarantee Scheme (Plenderleith 2012). In its 2008 annual report published in April 2009, HBOS said funding the newly formed Lloyds Banking Group’s balance sheet depended on money and capital market conditions not deteriorating further, on not experiencing a deposit withdrawal, and on continued access to government liquidity facilities including the Credit Guarantee Scheme (HBOS 2009).

Asset Protection Scheme

In January 2009, the government announced the broad-based Asset Protection Scheme, which was implemented 11 months later, in November 2009: Banks could pay an annual fee in return for a guarantee of 90% of losses above an initial amount (“the first-loss position”) from a defined portfolio of assets (House of Commons 2011; Plenderleith 2012).

In February and March 2009, RBS and Lloyds Banking Group agreed to participate in the Asset Protection Scheme (EC 2009b; Plenderleith 2012). Lloyds Banking Group decided not to participate in November but paid a fee of GBP 2.5 billion for the implicit protection it received from March to November (Plenderleith 2012). After the initial agreement, HM Treasury and RBS amended the terms of the bank’s participation in the Asset Protection Scheme following due diligence valuation work on its long-term expected credit losses. HM Treasury lowered the amount of assets covered from GBP 325 billion to GBP 281 billion, though the nature of the portfolio and number of asset classes remained the same. HM Treasury also increased RBS’s first-loss position from GBP 42.2 billion to GBP 60 billion (21% of the portfolio notional amount) (EC 2009b).

RBS participated in the Asset Protection Scheme until October 18, 2012, and had insured GBP 282 billion worth of assets in exchange for a GBP 2.5 billion fee (EC 2014; Plenderleith 2012).

In a 2011 report, the House of Commons said that Lloyds and RBS struggled to provide HM Treasury with data on their respective assets in a timely manner. RBS blamed its delay on its recent joint acquisition of ABN AMRO, which resulted in 20 different information technology (IT) systems across the entire group. HM Treasury was unsure of the underpinning legality of RBS assets because of “the poor state of the IT systems” (House of Commons 2011, 7). Thus, HM Treasury’s accounting officer sought guidance from UK ministers to proceed. RBS assured HM Treasury that there was no material or systemic criminal conduct with the covered assets and promised to provide updates if it uncovered any such conduct (House of Commons 2011).

No statutory authority provided for emergency lending in the UK. Rather, the BoE enjoyed broad discretionary powers for emergency liquidity assistance to banks under the Tripartite Memorandum of Understanding, since 1998 and updated in 2006, among HM Treasury, the BoE, and the FSA (IMF 2016a; Plenderleith 2012). Under the MoU, the BoE was responsible for “undertaking, in exceptional circumstances, official financial operations, in accordance with the arrangements in paragraphs 13 and 14 of this Memorandum, in order to limit the risk of problems in or affecting particular institutions spreading to other parts of the financial system” (BoE 2006, 2).

Paragraph 13 of the MoU covered the process for assessing the seriousness of a crisis and considering appropriate measures. Paragraph 14 addressed the possibility of a need for operations beyond the BoE’s published framework (BoE 2006). The MoU did not specifically mention the possibility of an HM Treasury indemnification or other forms of state support (HMT, BoE, and FSA 2006). However, it did say that the chancellor of the Exchequer—the head of the Treasury and the government’s chief financial minister—had ultimate legal responsibility for authorizing support operations during exceptional circumstances (BoE 2006). The governor of the BoE received authorization from the chancellor for the emergency liquidity to HBOS and RBS (Plenderleith 2012).

The 1998 Banking Act provided the BoE with the ability to limit disclosure (BoE 2010a); see Key Design Decision No. 6, Communication and Disclosure.

As a then-member of the EU, the UK had to comply with the prohibition on monetary financing contained in Article 123(1) of the Treaty on the Functioning of the European Union (TFEU)^FThe TFEU, itself based on the Treaty of Maastricht of 1992, is one of the EU’s two foundational treaties (the other being the Treaty on European Union). It sets out in detail the principles and objectives of the EU and the scope and functional responsibilities of EU institutions (the Treaty on European Union in contrast defines the EU’s purpose and lays out its institutions and form). As a technicality, before the Lisbon Treaty came into effect in 2009, TFEU Article 123 was Article 101 of the Treaty Establishing the European Community, but the content was unchanged when the Lisbon Treaty relocated the article., which reads (emphasis added):

Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments. (EU 2009, art. 123)

TFEU Article 123 prohibits the extension of liquidity to insolvent firms (at least without a state guarantee), as such is considered a public undertaking (in other words, one that should be supported with state resources). The monetary financing prohibition—including its application to emergency liquidity—is EU-level law, and thus applies even to those nations that are Member States of the EU but not members of the Eurosystem. For more on the application of the monetary financing prohibition to emergency liquidity assistance, see Arnold (2025).

The European Commission report on the aid to RBS during the crisis noted that RBS was a solvent financial institution not in breach of regulatory capital requirements as of October 7, 2008. The EC said that the liquidity assistance provided up to October 13 was part of the BoE’s normal monetary operations and not State Aid. After October 13, 2008, the emergency liquidity assistance was State Aid given the announcement of HM Treasury to recapitalize RBS and to guarantee the BoE’s lending. The EC ruled the measure was rescue aid compatible with the treaty as the beneficiary (RBS) was in difficulty, the interest rate was sufficiently high, and the operations were secured by high-quality collateral with haircuts. The BoE also monitored the facility closely and limited draws to the minimum necessary for RBS to fulfill its lending operations, and RBS repaid the facility in a timely manner (EC 2009c).

The EC report on aid to Lloyds Banking Group was released before the BoE made the emergency liquidity public and did not mention the facility (EC 2009a).

The BoE administered two distinct facilities, a sterling facility and a dollar facility. It issued the sterling loans in the form of UK Treasury bills to HBOS and RBS. It issued US dollars in return for UK Treasury bills to RBS (see Figure 4). The BoE had operational experience extending liquidity support to Northern Rock in September 2007, which informed the structure of the SLS and the October 2008 liquidity facilities (see Decker, French, and Shyu (2025) (Plenderleith 2012).

Sources: Plenderleith 2012; authors’ analysis.

The Court of the Directors of the Bank of England is responsible for managing BoE affairs excluding monetary policy. The Court doesn’t have sole responsibility for decisions on extending liquidity facilities, but the governor of the BoE needs to consult the Court in such matters. Specifically, the BoE needs to consult with the Transactions Committee (TransCo), at the time a three-member committee that would be consulted on transactions outside the BoE’s normal operations (BoE 2009b; Plenderleith 2012). After its initial period of lending to Northern Rock, the BoE created a new structure for future emergency lending, inclusive of establishing TransCo to facilitate consultation with the Court and to help with the need to make decisions quickly. TransCo met five times in October 2008 to discuss terms of the emergency lending including a meeting on October 1, the day the HBOS facility was put in place and first drawn. However, the chancellor of the Exchequer held ultimate responsibility for the decision, as is outlined in the MoU (HMT, BoE, and FSA 2006; Plenderleith 2012).

The BoE implemented the sterling liquidity facilities by creating trusts to hold the collateral offered by the borrowing banks, with the BoE being granted beneficial interest in the trusts. The BoE determined the valuations and haircuts for the collateral and managed valuation and risk management internally (BoE 2010a; Plenderleith 2012). The BoE assessed the collateral largely by comparing the raw loans to securitized loans under the SLS. Because the liquidity programs were technically off balance sheet for the BoE, they were not visible in the weekly BoE balance sheet summary, and the BoE was not required to take charge of the assets. Those features helped keep the emergency liquidity confidential. Unless the recipients of the emergency liquidity defaulted, the credit risk associated with the loans in the collateral trusts remained with the banks (Plenderleith 2012).

The BoE maintained secrecy thanks in part to the existence and usage of the SLS—the standing, market-wide facility under which the BoE lent against an extended range of collateral since April 2008. Because the sterling liquidity facility extended to HBOS and RBS was very similar to the liquidity provided under the SLS, the provision of T-bills and the subsequent use was not distinguishable in the market from activities under the SLS. General market disturbances in 2008 also helped keep the liquidity assistance unnoticed. Changes in funding conditions at the banks such as the change from struggling to roll over short-term funding before the emergency liquidity to having more normal funding after the emergency liquidity was obscured by the October 8 announcement of the bank recapitalization scheme and the Credit Guarantee Scheme (Plenderleith 2012).

The US dollar facility for RBS used existing legal documentation between RBS and the BoE for the market-wide US dollar repo operations. The legal structure for the sterling facility was first suggested by HBOS’s legal advisers. The advisers provided draft legal documentation, which the BoE adapted (Plenderleith 2012).

The Court had responsibility for the BoE’s risk management policies. TransCo monitored the terms of the facilities and the risk to the BoE and was involved in getting the guarantee from the Treasury for amounts outstanding above GBP 51.1 billion (Plenderleith 2012). The BoE approached the Treasury after the aid had reached a significant level relative to the BoE’s capital (BoE 2010a). The Treasury granted the indemnity on the basis of the size of the operations and the other demands on the BoE’s balance sheet. The Treasury said the indemnity did not have anything to do with the perceptions of increased risk around lending to banks (UK Parliament 2009).

TransCo’s terms of reference say that generally the governor of the BoE is required to report outcomes of meetings to the full Court as soon as possible, or at another time determined by TransCo in consultation with the governor of the BoE. In the case of the aid to HBOS and RBS, the governor and TransCo decided to delay reporting on the basis of secrecy being necessary for the success of the programs. They told the Court in November 2008 that meetings had taken place during October, but there was no disclosure of content. The liquidity facilities, which began in October 2008, were first reported to the BoE’s external auditors, KPMG Audit Plc, in February 2009 and to the Court’s Audit Committee in May 2009 so that they could agree to the annual report (Plenderleith 2012). The Court’s audit committee consists of a subset of the Court and normally meets four times per year with functions including reviewing the work of internal and external auditors and assisting the Court in its reporting, internal control, and risk management functions (BoE 2009b). The rest of the Court was notified only in November 2009 once the BoE made the information public and informed Parliament (Plenderleith 2012).

After the intervention, the Banking Act of 2009, effective February 2009, created the Financial Stability Committee (FSC), which superseded TransCo as the relevant body for consultation relating to emergency liquidity assistance. The FSC comprises the Governor, two Deputy Governors, four members of Court nominated by the Chair of Court, and a non-voting Treasury observer (Plenderleith 2012). TransCo comprised the chairman of the Non-executive Director Committee (NedCo) and two additional members, normally the deputy chairman of NedCo and the chairman of the Audit Committee (BoE 2009b).

The Bank of England assembled multiple reports on the intervention after the crisis had passed (BoE 2015; Plenderleith 2012). The National Audit Office also wrote a report covering the emergency lending and other interventions (NAO 2009).

The BoE did not publicly announce the intervention until November 2009, more than a year after it was first implemented, and it was even unknown to members of the government and some of the BoE’s Court of Directors until that time. On November 24, 2009, the governor of the BoE wrote a letter to the chairman of the House of Commons Treasury Select Committee and disclosed, for the first time publicly, the existence of the facilities, their repayment dates, the maximum usage, and the BoE’s rationale for secrecy (BoE 2009a; Plenderleith 2012). Members of the BoE including Mervyn King and Paul Tucker appeared before the Treasury Select Committee that day and answered questions on the emergency liquidity (House of Commons 2009). Media outlets reported on the disclosure of the facilities and the comments from the hearing (Hopkins and Treanor 2009). Tucker said in the hearing that the lending “was an absolutely classic lender of last resort operation where the only point of doing it was whether it bridged to something” and that “it was very effective in buying time” (House of Commons 2009, 8).

TransCo and the governor of the BoE were aware of the lending as it occurred, and the Audit Committee and external auditor KPMG became aware later on so that they could certify the 2009 annual report (Plenderleith 2012). The liquidity facilities were not covered in the BoE’s annual report for 2008–2009, released in May 2009 (BoE 2009b). The bank determined the risks to stability outweighed the public’s interest in disclosure at the time (BoE 2010a). The Banking Act of 2009 changed the membership of the Court at the end of May 2009. A number of members of the Court had potential conflicts of interest since they held positions on the boards of financial institutions. That, as well as the ongoing need for secrecy, led the BoE to judge the delay in revealing the intervention as necessary (Plenderleith 2012). When deciding in favor of providing indemnity to the BoE, the chancellor of the Exchequer, head of the UK Treasury, agreed that the intervention should remain confidential (UK Parliament 2009).

The 1998 Banking Act provided the BoE with the ability to limit disclosure. The financial implications of emergency lending are always included in the BoE’s published accounts, but the BoE can keep individual transactions secret until the need for such confidentiality is over, as the BoE determined it was in November 2009 (BoE 2010a).

Because they used collateral swaps, the liquidity programs were off balance sheet for the BoE, thus not visible in its weekly balance sheet summary (Plenderleith 2012). The BoE amended its weekly reporting regime in 2014 to reduce the potential for transparency to negatively impact its ability to undertake operations to support financial stability (BoE 2014). The weekly report at the time, the Bank Return, showed an increase in the BoE’s “Other Assets” from GBP 38 billion on September 24, 2008, to GBP 162 billion on October 15, 2008, but does not break down the category (BoE 2008d; BoE 2008e). The BoE’s current weekly report webpage says the report typically discloses more than 90% of the balance sheet by value (BoE n.d.). The BoE’s annual report covering 2008 reflected the balance sheet as of the end of February 2009 (BoE 2009b).

The BoE’s annual report for 2009–2010, released in June 2010, after the information was public knowledge, included limited details about the liquidity facilities such as approximate size, rates, and dates (BoE 2010a).

The BoE did announce on October 8, 2008, that it intended to take “all actions necessary to ensure that the banking system has access to sufficient liquidity” and that recapitalization would be necessary for restoring confidence in the financial system (BoE 2008c).

HBOS and RBS decided not to disclose the liquidity facilities at the time. RBS repaid its borrowings before the end of the calendar year (Plenderleith 2012). In its 2008 annual report, HBOS listed “Other borrowed funds” as of December 31, 2008, as approximately GBP 22.2 billion (HBOS 2009, 46). About GBP 13.8 billion of that was not attributed to a specific source (HBOS 2009).

After the BoE disclosed the emergency liquidity in 2009, a new procedure was formed for the disclosure of future instances of BoE emergency liquidity assistance with an indemnity from the Treasury. The procedure requires the chancellor of the Exchequer to brief the chairs of the Treasury Committee and the Public Accounts Committee at the time of the operation. The chancellor then consults with the governor of the BoE every three months regarding when to disclose the emergency lending to Parliament and the public. The Plenderleith report on the emergency lending suggests that the quarterly review of the timing and appropriateness of disclosure should be followed for ad hoc emergency liquidity that is not indemnified as well. The report also recommends a more structured process for reporting in the future, given the scale of the risk that the BoE can take on (Plenderleith 2012).

There was no predetermined size limit for the liquidity facilities. The BoE believed an emergency lending operation necessitates that the central bank be willing to lend as much as the bank requesting support needs (Plenderleith 2012). HBOS had a peak outstanding of GBP 25.4 billion^FAccording to HBOS’s annual report for 2009, use of emergency liquidity peaked at GBP 25.7 billion (HBOS 2010). on November 13, 2008 (BoE 2009c). RBS had a peak outstanding of USD 25 billion (GBP 14.5 billion) between October 10 and October 17, 2008, under the dollar liquidity facility and a peak outstanding of GBP 29.4 billion on October 27 under the sterling facility. Combining both the dollar and sterling facilities, RBS’s usage peaked at GBP 36.4 billion on October 17. The amount HBOS and RBS borrowed from the BoE peaked in aggregate at GBP 61.5 billion on October 17, 2008. The BoE consulted TransCo each time it needed to lend more to the banks. Figure 3 shows amounts outstanding by facility. Both banks made quick use of the facilities, and amounts outstanding grew rapidly during the first month (Plenderleith 2012).

For the sterling facility, the BoE borrowed Treasury bills from the Debt Management Office. For the US dollar facility, the BoE used dollars from its swap line with the US Federal Reserve (Plenderleith 2012).

For the sterling liquidity facility, the BoE charged 2% of the daily market value of outstanding Treasury bills lent to HBOS and RBS (Plenderleith 2012). Effectively, that meant it was offering the funds at a 2% spread to the BoE’s policy rate, which was 5% as of October 1, 2008 (BoE 2008b). The total income collected on the sterling lending across RBS and HBOS amounted to GBP 176.2 million. The BoE retained GBP 151.1 million of that after paying GBP 6.2 million (7 bps on the amount of Treasury bills borrowed) to the Debt Management Office for the Treasury bills it used and GBP 18.9 million (170 bps on the amount indemnified) to the Treasury for the loss protection (Plenderleith 2012).

The BoE’s SLS, the most similar of its market-wide operations, charged a rate based on the spread between the three-month London Interbank Offered Rate (LIBOR) and the three-month repo rate (Nygaard 2020; Plenderleith 2012). That spread ranged between 1.12% and 2.25% for the duration of the facilities. That meant that the fee for the sterling facility, at 2%, was usually higher than the fee for SLS during that period. Still, the rates are not directly comparable to the ad hoc sterling facilities in question since the durations, haircuts, and collateral were different. The ad hoc fee was higher than the BoE’s emergency lending to Northern Rock the year before, which was done at 150 bps above the bank rate. From the BoE’s point of view, again, the Northern Rock emergency liquidity was not directly comparable because it was done in cash, with the bank rate as the opportunity cost of funds; since the sterling ad hoc emergency liquidity to HBOS and RBS was done in Treasury bills, its cost to the BoE was only 7 bps (the amount paid to the DMO) (Plenderleith 2012).

The rate for the dollar liquidity facility provided to RBS was the highest rate bid in that day’s market-wide US dollar repo auction. That income was then passed on to the US Fed under the terms of the swap line in place for the market-wide repos (Plenderleith 2012). See French (2023) for more information on the swap line between the US and UK. On the final repo with the RBS, the BoE retained 150 bps of the rate charged, but the previous three dollar liquidity facilities provided zero return to the BoE (Plenderleith 2012; Sheets 2022).

The sterling liquidity facilities were set up for one month and were renewable on a rolling basis. Within those agreements, the swaps themselves had 14-day durations and were also renewable. The US dollar liquidity facility draws had terms ranging from overnight to six days, similar to the terms of the market-wide repo facility at the time (Plenderleith 2012).

HBOS made its final repayment of emergency liquidity assistance on January 16, 2009 (HBOS 2010; Plenderleith 2012). During the emergency lending period, HBOS had time to securitize assets that it could then use for the SLS. The BoE also gave HBOS greater access to the SLS after the approval of HBOS’s merger with Lloyds TSB. HBOS’s ability to fund itself was also improved by debt issuance under the Credit Guarantee Scheme (Plenderleith 2012).

RBS made its final emergency liquidity repayment on December 16, 2008. Similar to HBOS, RBS repaid the sterling facility with help from debt issuance under the Credit Guarantee Scheme (see Key Design Decision No. 2, Part of a Package) (Plenderleith 2012).

RBS repaid its US dollar facility on October 17 in large part because the BoE’s market-wide US dollar repo operations became unlimited in size from that point forward (Plenderleith 2012).

The combined exposure under the ad hoc liquidity facilities and the Extended Collateral Long-Term Repo facility—a broad-based emergency liquidity program—was one of the largest risks to the BoE’s balance sheet in its history (Plenderleith 2012).

The BoE’s collateral risk management was based on the three tools of eligibility, valuations, and haircuts. The collateral for the 2008 assistance to HBOS and RBS consisted of unsecuritized loans that were ineligible for the BoE’s market-wide operations. There was no preexisting framework for valuing and deciding on the haircuts for the unsecuritized collateral (Plenderleith 2012).

For HBOS, the collateral consisted of four pools of mortgages that had not been securitized but were in that process. The BoE prioritized taking collateral that it was able to value accurately. The nominal value of the collateral provided by HBOS to the BoE peaked at GBP 66.1 billion. At the time of the ad hoc emergency liquidity assistance, the BoE believed it could become necessary to provide unsecured lending to HBOS. The BoE made preparations to lend against additional types of commercial and consumer loans, but there were ultimately no draws against this collateral (Plenderleith 2012).

RBS provided four mortgage pools and three pools covering personal loans, SME loans, and corporate loans. The nominal value of the collateral provided by RBS to the BoE peaked at GBP 65.6 billion under the sterling liquidity facility. The US dollar liquidity facility collateral was Treasury bills that were obtained from the SLS at first and later from the sterling liquidity facility (Plenderleith 2012). Figure 5 shows the breakdown of collateral HBOS and RBS provided to the BoE in the sterling liquidity facilities.

Note: Data are for respective peak usages: October 17, 2008, for RBS, and November 13, 2008, for HBOS.
Source: BoE 2010b.

The BoE determined the valuations and haircuts for the collateral consistent with its market-wide facilities (BoE 2010a). The BoE’s Risk Management Division had developed some expertise in valuing and haircutting collateral for securitized loans under the SLS, and the unsecuritized valuations and haircuts were largely set by looking at analogous securitized collateral taken under the SLS (Plenderleith 2012).

Different haircuts applied to different collateral pools. The average haircuts were 48% of the par value of the collateral for HBOS and 49% for RBS (Plenderleith 2012).

The BoE based the haircuts on three elements: “AAA,” “valuation,” and “conventional” haircuts (Plenderleith 2012, 52). The “AAA haircut” was meant to bring the credit protection up to the AAA level. The “valuation haircut” was meant to replicate the effect of having market pricing for what were untradable loans. The “conventional haircuts” were then based on equivalent securitized instruments with add-ons for other typical and idiosyncratic risks in the securitization (Plenderleith 2012).

Depending on how much funding the banks actually needed, it was common for the market value of the Treasury bills lent to be below even the haircut-adjusted value of the collateral, meaning the BoE had even more protection than it required (Plenderleith 2012). Figure 6 shows the value of the collateral provided by each bank in the sterling liquidity facilities.

The two sterling facilities were structured as collateral swaps, so they did not expand the amount of reserves in the system.^FHowever, the bank did borrow the Treasury bills from the DMO, so, the trust structure notwithstanding, the BoE balance sheet did expand. As a result, the BoE did not need to use open market operations to pull reserves out of the system (Plenderleith 2012).

From the time the liquidity facilities were first implemented, the two banks were subject to increased monitoring, especially around daily liquidity management. The BoE’s 2012 report on the liquidity programs states that moral hazard was minimized by the terms of the emergency liquidity, including the fee as well as the oversight that the banks were subjected to, the loss incurred by the shareholders, and the reputational damage to the banks and the senior management (Plenderleith 2012).