TWO BRITISH banks got within hours of a liquidity shortfall on October 6th and 7th last year as the British financial system came to the brink of collapse, according to Bank of England governor Mervyn King.

“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,” the BBC cited Mr King as saying in an interview broadcast last night.

Mr King was referring to Royal Bank of Scotland, which owns Ulster Bank, and HBOS, the parent group of Bank of Scotland Ireland and Halifax, the BBC said.

Prime minister Gordon Brown’s government pledged to invest about £50 billion (€54.8 billion) in the banking system on October 8th last to save it from meltdown after the Lehman Brothers bankruptcy a month previously.

“It was, it is, probably the worst situation . . . we faced in peacetime,” chancellor Alistair Darling said, according to the BBC.

The BBC corrected its original release to say RBS was one of the two banks in trouble, and not Lloyds TSB Group Plc. In the wake of Lehman’s collapse, Lloyds TSB took over HBOS Plc, the nation’s biggest mortgage lender, to form Lloyds Banking Group Plc. An RBS spokesman declined to comment on the story.

The TV programme, The Love of Money, is the third in a BBC2 series on the earlier part of the financial crisis. Edward Lazear, chairman of George W Bush’s Council of Economic Advisers at the time, told the programme: “We literally thought that we were on the verge of the Great Depression, and looking back I think we probably were.”

Mr King said that allowing the banks to fail would have brought the economy to a halt, the BBC said. “Individuals would not have had access to the money in that bank,” he was cited as saying. “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. 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,” Mr King said, according to the BBC.

UK business minister Shriti Vadera called a meeting of senior bankers on October 7th last to advise the government on the bailout plan. “We really only knew by probably about 7 o’clock at night that we, that everyone, was going to get through the next day,” David Soanes, a managing director at UBS in London, was quoted as saying.

On October 2nd, the Irish Government had guaranteed all deposits and borrowings at six of its biggest banks to assure customers they could withdraw their money and avoid a bank run. The decision rattled other European governments, because it encouraged depositors to move their holdings to Ireland.

Minister for Finance Brian Lenihan told the BBC that there was no other choice because of the risk of panic. “We were anxious to avoid that at all costs,” Mr Lenihan said. “The policy options available to us were to immediately nationalise an institution. If we immediately nationalised that institution, the risk was that it could lead to a systemic collapse of all the other institutions.”

French finance minister Christine Lagarde said the decision was “a bit of a shock”, the BBC said. Mr Darling told the programme that “the lesson that you draw here is you can’t do these things on your own”. – (Bloomberg)