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Extra loans available for banks Extra loans available for banks
(about 3 hours later)
Banks and building societies will have the chance to bid for up to £10bn worth of Bank of England funds on Wednesday.Banks and building societies will have the chance to bid for up to £10bn worth of Bank of England funds on 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 auction is the first in the Bank's history, a dramatic step taken to ease the strains in the 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.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.
However, the Bank of England loans will carry a high rate of interest - a minimum of 6.75%.However, the Bank of England loans will carry a high rate of interest - a minimum of 6.75%.
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.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.
Policy 'U-turn' The only banks for whom it would be rational to take advantage of the Bank's auction would be those smaller banks in danger of running out of money Robert Peston, BBC business editor class="" href="http://www.bbc.co.uk/blogs/thereporters/robertpeston/">See Robert Peston's blog class="" href="7004383">Bank of England auction Q&A
The Bank of England announced its offer of three-month loans at the height of the crisis surrounding Northern Rock on 19 September.The Bank of England announced its offer of three-month loans at the height of the crisis surrounding Northern Rock on 19 September.
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.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.
Policy 'U-turn'
Over the past month, the Bank has made available more than £20bn of funds for banks to borrow for periods lasting up to a week.
This was to cover shortfalls in their reserves, rather than to bail out lenders who had allowed themselves to get burned by the fallout in the US sub-prime meltdown.
The auction on Tuesday is the first such measure taken by the Bank of England specifically to tackle the logjam in the credit markets.
However, the US Federal Reserve and European Central Bank have held a number of such auctions in recent months.
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%.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%.
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.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.
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 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.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?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.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.Some bankers argue that the Bank of England's terms look prohibitively expensive in comparison.
BBC business editor Robert Peston suggests it would be "irrational" for any of the major banks, such as HSBC, Royal Bank of Scotland and Barclays, to borrow money from the Bank of England at 6.75%, as he says "they are awash with cash".
"The only banks for whom it would be rational to take advantage of the Bank's auction would be those smaller banks in danger of running out of money and to which the other bigger banks don't dare lend," he added.
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.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.
"We expect strong demand and high bidding rates due to the Bank's willingness to take unpackaged mortgages as one of the forms of collateral," said John Wraith, strategist at RBS.