The Bank of England this week revealed that it provided covert “emergency liquidity assistance” (ELA) to RBS and HBOS between 1 October 2008 and 16 January 2009, with the combined loan peaking at £61.6 billion on 17 October 2008. Why were analysts unable to uncover this operation from the Bank’s weekly balance sheet, the “Bank return”?

The RBS / HBOS loans, like the earlier Northern Rock facility, were probably recorded under “other assets” on the Bank return. “Other assets” were on a declining path from early 2008, reflecting the repayment and eventual transfer to the Treasury of the Rock loan. They surged, however, after Lehman’s failure, rising from a low of £21 billion on 10 September 2008 to a peak of £170 billion on 22 October. It now appears that about £60 billion of this increase was due to the RBS / HBOS loans.

The problem for analysts at the time was that “other assets” were simultaneously being boosted by US dollar repo operations, involving the Bank borrowing from the Federal Reserve under a swap arrangement and lending on to banks short of dollar funding. These operations began on 18 September 2008 and rose to a peak around the same time as the RBS / HBOS loans.

While it was possible to track the Bank’s dollar lending to the market, the swap facility could, in theory, have involved the Bank holding additional dollar cash in a reserve account at the Fed. This would also have been included within “other assets”. So although the dollar loans were smaller than the rise in “other assets”, it would have been a leap to conclude that the Bank was engaging in additional covert lending.

The hypothesis that the surge in “other assets” was due to the swap arrangement was seemingly supported by a similar change in “other liabilities” on the Bank return – these would have included the borrowing from the Fed and rose from £16 billion to £158 billion between 10 September and 22 October 2008. In fact, part of this increase was probably also connected with the RBS / HBOS support. In particular, “other liabilities” may have included a loan from the Treasury / Debt Management Office (DMO) to the Bank to finance the ELA operation, with the DMO funding the loan via debt sales.

“Other assets” stood at £192 billion last week (18 November) but now include a loan of £180 billion (19 November) to the asset purchase facility (APF). In other words, without the APF “other assets” would have fallen back to £12 billion – the level in early September 2007, just before Northern Rock imploded.