Bank of England Loaned 1.6 Billion Pounds at (6.75%) its highest rate, suggesting commercial banks are reluctant to provide credit

Bank of England Loaned 1.6 Billion Pounds at 6.75%

http://www.bloomberg.com/apps/news?pid=20601087&sid=aFYH1NWj806w&refer=home

By Jennifer Ryan

Aug. 30 (Bloomberg) -- The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market.

The money lent at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower.

The pound fell on concern the credit crisis is infecting global assets. The Bank of England hasn't auctioned any additional money or changed any of its lending rates, unlike the Federal Reserve or the European Central Bank.

``It is a massive number, but it's important to understand if it is a single institution or a number of borrowers,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``It's not clear if this is going to increase people's risk aversion.''

Euroclear's CrestCo, which settles trades in London, said in a statement there was a ``processing disruption'' with the Bank of England yesterday. Still, this was ``managed routinely'' and no client reported any ``settlement issues'' to the agency.

A Bank of England spokeswoman declined to comment, when asked whether the demand for funds was linked to the disruption.

Overnight Rates

The overnight interbank offered rate charged by banks for pounds rose to 6.13 percent from 5.90 percent yesterday and the three-month sterling rate increased to 6.63 percent from 6.61 percent. The pound fell to $2.0074 by 1:22 p.m. in London.

The Bank of England, which announced the loan in its daily report on money market operations in London today, didn't provide the name or number of borrowers. The Bank of England spokeswoman declined to comment.

Fifty-seven banks are eligible to tap the standing lending facility. Bradford & Bingley Plc spokeswoman Siobhan O'Shea said the Bingley, England-based bank didn't use it. Barclays spokesman Alistair Smith, HSBC spokesman Richard Lindsay, Deutsche Bank AG spokesman Ronald Weichert and Commerzbank AG spokesman Maximilian Bicker declined to comment.

Royal Bank of Scotland Group Plc spokeswoman Carolyn McAdam, HBOS Plc spokesman Mark Hemmingway, Lloyds TSB Group Plc spokeswoman Kirsty Clay and Northern Rock Plc spokesman Brian Giles also declined to comment. People at Alliance & Leicester Group Plc weren't immediately available for comment.

Standing Facility

The standing facility allows banks to borrow from the central bank at 1 percentage point above the benchmark interest rate, currently at 5.75 percent. The bank repeated a statement that its standing facilities are available every day.

The facility has been tapped 19 times since the middle of 2006, according to the Bank of England Web site. Only four of those loans were for more than 1 billion pounds.

The biggest use of the facility to date was when banks borrowed a total of 5.93 billion pounds over three consecutive business days June 28 through July 2.

Losses in the U.S. subprime mortgage market have spurred a global credit crunch, meaning companies that depend on commercial paper, debt due in 270 days or less, face fund shortages as investors refuse to buy debt secured by assets.

The crisis has prompted the U.S. Federal Reserve and the European Central Bank to pump extra money into markets since Aug. 9 to avert a breakdown in lending. The Fed cut its discount rate on loans to banks by a half-point to 5.75 percent Aug. 17.

U.S. Borrowing

The Fed is due to announce how much it loaned U.S. banks in the past week, at 4:30 p.m. in Washington. Banks borrowed a daily average of $1.2 billion in the previous week, as the four biggest lenders sought to show support for the Fed's discount- rate cut.

Basis Capital Fund Management Ltd., an Australian investment company, said today it sought bankruptcy protection for one of its hedge funds, fueling concern that other hedge funds will report losses when they disclose August valuations to investors next week.

Defaults on home loans by Americans with bad credit have forced more than 100 mortgage companies to close, while Bear Stearns Cos. also sought protection for two hedge funds.

Business conditions for securities firms are worse than in the second half of 1998, when currencies across Asia collapsed, and revenue from investment banking and trading could fall 47 percent in the final six months of this year, Standard & Poor's said in a statement yesterday.

Edited 1 time(s). Last edit at 08/30/2007 01:15PM by regli.