King advised Darling not to lend to Lloyds

The Governor of the Bank of England Mervyn King has spoken out about his advice to the Chancellor of the Exchequer with regards to a loan request from banking giant Lloyds TSB.

The high street bank had approached the Bank of England for a loan to the tune of £30 billion in order to fund the takeover of Northern Rock. However, the governor advised the chancellor not to authorize the loan, which Lloyds wanted to take out over two years at competitive rates.

According to Mr King he told Darling that the Bank of England should not be providing loans to a company in order to allow the takeover of another company.

Speaking on Radio 4 Mr King stated: “I said to the chancellor: ‘This is not something which a central bank can do. They don’t normally finance takeovers by one company for another, let alone to the tune of £30bn, which is rather a large amount of money’.”

When speaking on Radio 4 Mr King also added that it could take months before banks get back to normal following the effects of the credit crunch.

He stated: “I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we’re going in the right direction.”

He also added: “There is always, in a period like this, the possibility that a shock from outside the UK, one from the world economy, might create further fragilities, but to some extent there are always risks, there are always fragilities. What I would say is that the situation now is, in my view, different from that in August, though it’s not without risk.”

Tom Smith
15th November 2007