This article is from the source 'bbc' and was first published or seen on . It will not be checked again for changes.

You can find the current article at its original source at http://news.bbc.co.uk/go/rss/-/1/hi/business/7013568.stm

The article has changed 10 times. There is an RSS feed of changes available.

Version 0 Version 1
Extra loans available for banks Extra loans available for banks
(about 4 hours later)
Banks and building societies will now be able to borrow additional funds from the Bank of England in a move aimed at reducing the "credit squeeze". Banks and building societies will have the chance to bid for up to £10bn worth of Bank of England funds on Wednesday.
However, it is not yet clear how many banks will take up the offer of loans - available from Wednesday. The auction is one of four to be held by the Bank, aiming to ease the strains in the crisis-hit money markets.
The Bank of England hopes that its intervention will help restore normal trading in the wholesale money markets. The move is designed to ensure that lenders do not face the kind of funding crisis that hit Northern Rock, which forced it to ask for emergency funds.
When the bank announced its offer of three-month loans last week it was widely seen as a policy U-turn. However, the Bank of England loans will carry a high rate of interest - a minimum of 6.75%.
The move is designed to ensure that other lenders do not face the kind of funding crisis that engulfed Northern Rock, prompting it to apply to the Bank of England for emergency funding a fortnight ago. There is also concern that, although the names of borrowers will not be announced, the City rumour mill will identify those taking up the loans, which would highlight their need to get hold of extra funds.
Following a run on the bank by customers, the government pledged to guarantee all Northern Rock deposits held in accounts as of midnight, 19 September. Policy 'U-turn'
£10bn available The Bank of England announced its offer of three-month loans at the height of the crisis surrounding Northern Rock on 19 September.
Northern Rock confirmed on Tuesday that it was cancelling the dividend that it was due to pay to shareholders next month. The move was widely seen as a policy U-turn, but the Bank wanted to ensure that no other commercial bank faced the same pressures as Northern Rock and was keen to restore confidence in the British banking system.
Under the Bank of England's offer of three-month loans, it will accept a wider range as collateral including mortgage debt. At the time, the three month inter-bank interest rate, or Libor, which is the rate banks borrow money from each other, had surged past the Bank of England's emergency lending rate of 6.75%.
To access some of the £10bn on offer, the banks will have to pay a high rate of interest - at least 6.75%. This suggested that banks were reluctant to lend money to each other because of various uncertainties in the financial system rooted in the US sub-prime mortgage crisis.
And although the names of borrowers will not be announced, some may fear being identified by the City rumour mill as "needing" to borrow money at painful rates, BBC business correspondent Nils Blythe said. In recent months, many people on low incomes or with bad credit histories who have taken out mortgages have been unable to repay them because of steeper interest rates.
In addition, it emerged that major banks across the US and Europe were affected by this because they had been investing for years in bundles of debt which had included these sub-prime loans.
Return to normal?
The Libor rate has dropped sharply in the past week or so, now hovering at about 6.34%, which means the wholesale money markets appear to be starting to return to normal after the recent turmoil.
Some bankers argue that the Bank of England's terms look prohibitively expensive in comparison.
Under the Bank of England's offer of three-month loans, the assets that banks are allowed to use as collateral will be wider than usual and will include their mortgage debt.