Bank pumps £5bn into money markets

The Bank of England today pumped an extra £5bn into money markets in the wake of the crisis at US investment bank Lehman Brothers.

The funds were almost five times oversubscribed by banks, which put in bids totalling £24.1bn - a sign of the fresh pressure on the financial system following the news.

It is the Bank's first such move since March, when markets were rocked by the bail-out of fellow investment bank Bear Stearns.

The Bank added: "This action is being taken in response to conditions in the short-term money markets this morning."

The three-day auction comes alongside the Bank's regular weekly operation on Thursdays.

The European Central Bank also made undisclosed funds available to financial institutions.

It said: "The ECB continues to closely monitor the conditions in the euro area money market. The ECB stands ready to contribute to orderly conditions in the euro money market."

The Zurich-based Swiss National Bank meanwhile said it was providing liquidity to markets in "a generous and flexible manner".

The coordinated move by the banks is an attempt to combat the latest seizure in money markets panicked by Lehman Brothers' woes.

Since the credit crunch, banks nervous of losses in the financial fall-out from the collapse of the US housing market have hiked the rate at which they lend to each other.

This has made loans and mortgages scarcer and more expensive, hitting the UK housing market and the wider economy.

Every fresh jolt to the system renews pressure on the markets, despite initiatives such as the Bank of England's special liquidity scheme.

This allows banks to shore up their balance sheets by swapping riskier assets for safer Treasury bonds but will come to an end in October.

Royal Bank of Scotland analyst Jacques Cailloux warned: "It remains to be seen whether today's operation will be sufficient to restore market confidence."