Bank warns emergency borrowers

Chris Giles and Peter Thal Larsen
Financial Times
Friday Aug 31, 2007

The Bank of England has warned financial institutions authorised to use its emergency lending facility that they are not supposed to discuss it publicly.

The warning came after it announced on Thursday that the facility had been tapped for a second time since turmoil gripped global money and credit markets.

On Wednesday, one or more banks borrowed £1.55bn ($3.13bn) overnight from the central bank, reigniting fears that UK banks faced severe liquidity difficulties and sending sterling and money markets sharply lower.

The overnight rate in the interbank market spiked higher to 6.13 per cent, almost 0.4 percentage points higher than the Bank of England’s official 5.75 per cent rate. The pound initially fell 0.5 per cent to $2.0046 against the dollar before recovering ground to close slightly up in London at $2.0160.

But the fears in the market appeared to be groundless last night. It is understood that the lending facility was used for operational reasons and not because a UK-based bank faced a sudden shortage of sterling.

The amount borrowed was large but the circumstances were understood to be of a technical nature. At the end of June other technical problems led to nearly £4bn being borrowed using the same facility.

The Bank of England stands ready to lend unlimited amounts at a rate of 6.75 per cent, one point above its official rate, in a facility that has been used 14 times already this year.

On Wednesday afternoon, the link between Crest, the UK ­settlements house, and the Bank of England’s electronic settlements system, broke down for an hour, potentially interfering with banks’ transactions. Crest said that it had extended the deadline for settlements by an hour in order to clear any backlog, and had not received any complaints.

Use of the Bank of England’s reserve facility, which goes largely unnoticed in calm markets, has been the subject of intense scrutiny in recent weeks as investors search for signs of financial distress. Last week, Barclays was drawn into an embarrassing dispute with HSBC, its UK rival, after being forced to borrow £314m from the reserve facility.

After the central bank’s ­warnings to users not to ­comment publicly, all the UK banks contacted by the Financial Times yesterday declined to ­comment.