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No takers in Bank of England sale
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Posted on
Oct 02 2007 8:09 AM
by
adnana
Banks have once again shunned a £10bn Bank of England money auction.
Analysts have suggested the 6.75% interest rates offered by the Bank were too high and as such turned off buyers.
It was the second such auction in the Bank's history, designed to ensure lenders did not face the kind of funding crisis that hit Northern Rock.
At the time of the crisis, the inter-bank interest rate at which banks borrow from each other had risen to a 6.9% high. They now stand at 6.3%.
However these three-month rates - known as Libor rates - still remain way above the Bank's base rate of 5.75%.
High cost
Financial institutions are angry that the central bank is unwilling to lend at a more favourable interest rate.
Experts also suggested that financial institutions were wary of taking up the offer for fear it would trigger speculation they were in financial trouble and so spark panic among savers and investors.
"It's the second time that this particular non-event has happened," Royal Bank of Canada strategist Richard McGuire said.
"I don't think it's really a surprise given that the cost of funds offered by the Bank is some way in excess of that reported in the money markets."
More auctions
The Bank of England announced its offer of three-month loans at the height of the crisis surrounding Northern Rock on 19 September.
It still plans to go ahead with another two auctions on the 10 and 17 October.
The crisis was triggered by the US sub-prime mortgage market as high numbers of lenders defaulted on loans.
Problems from the US fanned out across the globe as these sub-prime loans were repackaged with other debts and sold on.
As the full extent of the problem has yet to emerge - with many finance groups unwilling to reveal their exposure to the problem - banks became increasingly wary about lending to each other.
While Northern Rock had no interests in the US market, its business relied on lending on the wholesale banking market and that market had dried up, forcing it to call on the Bank of England for emergency funding.
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