Mervyn King, the Governor of the Bank of England, tried to head off criticism from bank bosses by unveiling new borrowing facilities for the sector yesterday just hours before a summit meeting called to address the credit crisis.
Mr King said he would make an extra £5bn of three-day funding available every week until the next meeting of the Bank's Monetary Policy Committee, which is scheduled for 9 April. The move follows mounting concern about a continued freeze in lending between the biggest banks, which has sent inter-bank interest rates soaring in recent days.
And it was reported last night that Mr King had told the bosses of Britain's biggest banks that he is sympathetic to their requests to be able to use, in an emergency, a wider range of collateral, including mortgages, for Bank of England loans.
Yesterday's auction of three-day money was oversubscribed to a similar extent to the facility offered on Monday. The Bank has made a total of £10.6bn available over the course of this week, but received bids for £30.3bn from banks keen to access funding on offer at cheaper rates than are available from each other.
Despite the additional funding, however, senior bank bosses who attended yesterday afternoon's meeting at the Bank are understood to have pressed the Governor to go even further.
Mr King met representatives from all six of Britain's biggest banks – in most cases including their chief executives – as well as several smaller institutions. He was told that while the new funding commitments from the Bank were welcome, much more needed to be done to ensure banks had access to funding during the credit crunch.
One problem identified was a shortage of money available for longer periods, with the three-month London interbank offer rate (Libor) climbing as high as 5.9875 per cent yesterday, well above the Bank of England base rate of 5.25 per cent and at a record level for the year.
While the Bank does make three-month money available at its monthly term auctions, as well as funding for longer periods, the banks expressed frustration that it has not been prepared to relax the collateral required to access such money to the same extent as the US Federal Reserve, for example, which now allows borrowers to put up mortgage assets.
Mr King was also asked why the Bank had not more often exercised its option of conducting "exceptional operations", which allows it to release money into the market when it is judged to be under stress. Banking groups said last night that more concerted action from the Bank was needed to steer the UK clear of the worst effects of the credit crisis.
Michael Coogan, the director general of the Council of Mortgage Lenders, said: "We have entered a substantially slower phase in the housing market and there will be ongoing problems in the mortgage-funding markets unless the Bank of England makes new, broader-based, attempts to improve levels of liquidity in the UK." Angela Knight, the chief executive of the British Bankers Association, added: "Banks are also concerned about being named when they use the Bank's standing lending facilities, which makes them very reluctant to do so."
The Bank is believed to be frustrated about the extent to which banks have gone on raising dividend payments to shareholders, despite increasing concern they might be required to find extra capital as the crisis mounts.
Mr King has stopped short of following calls by the US Treasury Secretary Hank Paulson for dividend cuts, but there has been mounting irritation at the size of some payouts in the UK.
The Bank is also desperate to ensure meetings such as yesterday's summit do not themselves cause panic.Reuse content