Michael Fallon approved of Bank “covert support”

Michael Fallon knew about the possibility of "covert support" for banks. A treasury select committee report recommended changes to the law to make it possible.

Michael Fallon, and other members of the Treasury Select Committee, knew about the possibility of “covert support” for banks and recommended a change in the law to stop the practice coming into conflict with European regulations. It was revealed yesterday that £61.6 billion had been used to “prop up” RBS and HBOS.

A January 2008 Treasury Select Committee, ‘The run on the bank‘, used the phrase “covert support” on 14 occasions and included a detailed section on its use under circumstances where the Bank of England would act as “Lender of last resort” (paragraphs 211-216).

According to today’s Times:

Michael Fallon, a Tory member of the committee, said that he was “outraged” by the delay in revealing the secret Bank of England loans.

But the Select Committee report acknowledges that, “The leaking of news of a support operation that was intended to remain covert for a period of time would have been potentially as damaging as the premature disclosure of an overt operation.” (para 141).

The report goes on to say (recommendations in italics):

214. If a support operation could be conducted covertly, the problem of stigmatisation might be avoided. In Chapter 4, we concluded that, in the case of Northern Rock, the barriers to a covert support operation were real and probably insuperable. These barriers were both practical and legal. Practically speaking, the chances of any large covert support operation going unnoticed by the market for any period of time at all are extremely slim, and it would not take long for the market to establish the identity of the recipient of such emergency lending.

215. In terms of legal barriers, we noted in Chapter 4 that the Governor of the Bank of England received legal advice to the effect that the Market Abuse Directive, as it stands, is a substantial barrier to a covert operation, even if information pertaining to the operation could be kept confidential. However, the Committee learnt on its visit to Brussels that preventing covert operations by a central bank was certainly not the intention behind the Directive. We recommend that the Government seek to work with the European Commission, European Central Bank and national central banks within the European Union to establish whether the Market Abuse Directive ought be amended, so as to ensure that covert support operations by a central bank are permitted in specified circumstances.

216. We further recommend that the Government review the interaction between the terms of the Market Abuse Directive and other aspects of the regulatory regime including the FSA guidelines, to ensure that they do not unnecessarily restrict areas of the discretion otherwise allowed under the Directive.

The formal minutes record that all these paragraphs were unanimously “read” and “agreed to” while paragraph 216 was inserted by Graham Brady, Conservative MP for Altrincham and Sale West.

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