The Bank of England turned down a request from Lloyds TSB for £30bn of loans to help fund Northern Rock's business in the event of it buying the ailing mortgage lender, the Bank revealed yesterday.
The admission came in a rare Bank of England public comment on the Northern Rock affair, in which it rejected the version of events put forward by Adam Applegarth, Northern Rock's chief executive.
Mr Applegarth told MPs on Tuesday that takeover talks with a potential saviour for his company collapsed after the Bank refused to offer the prospective bidder a funding facility in line with Northern Rock's. But the Bank of England said yesterday that the bidder asked for the £30bn over one or two years at a non-penalty rate, a vital difference, before Northern Rock's funding was agreed.
The central bank did not directly name Lloyds TSB but it is known to be the potential bidder that pulled out of talks with Northern Rock on 10 September.
The Bank said Lloyds' proposal was unacceptable to it, the Financial Services Authority and the Treasury because of the easy terms and the length required. But it said once Northern Rock's loan facility at a penalty rate was agreed, it was prepared to make it available to a bidder.
The Bank of England said: "The Tripartite Authorities were informed that a potential bidder wanted loans of up to £30bn over one to two years, without a penalty rate of interest, as part of the deal. The authorities, including the Bank of England, recognised the advantages of a takeover. They also agreed that in the circumstances it would be inappropriate to help finance a bid by one bank for another.
"The following weekend, after support for Northern Rock had been announced on 14 September, the Bank was asked whether the support facility would continue to be available in the event of a successful bid. The Bank agreed that it would be."
The Bank of England has been stung by criticism of its handling of the Northern Rock crisis and the credit crunch that caused it. Yesterday it held the last of four auctions of three-month money, designed to help banks if they cannot raise funds in the inter-bank market. As with previous sales, offered at a penalty rate of a point above base rate, no bank applied.
Inter-bank rates have eased since the peak of the crisis last month but industry sources have warned that the penalty rate may have dissuaded troubled institutions from bidding for fear of being identified.