Northern Rock taps emergency Bank facility for nearly £8bn

The European Central Bank lent €3.9bn (£2.7bn) at its penalty rate on Wednesday, signalling that money markets may still not be providing enough funding for the European banking system.

The amount lent to one or more anonymous borrowers was the highest for almost three years. Use of the facility costs 5 per cent, a point higher than the ECB's benchmark rate. The rate banks charge each other for three-month money in euros rose to a six-year high of 4.79 per cent yesterday, indicating that the credit crunch is still making Europe's banks wary of lending to each other.

The US Federal Reserve added $38bn (£19bn) of temporary reserves to the banking system, using four repurchase agreements. The American commercial paper market contracted for the seventh week in a row but at a slower rate, indicating buyers are starting to return to the market. Buyers of commercial paper fled in August after losses mounted on US sub-prime mortgages that backed the short-term debt issued by banks and other companies.

The ECB and the Fed have been more willing to pump money into the financial system in the credit squeeze. The ECB's willingness to support the markets with liquidity has contrasted with the Bank of England's tougher stance.

The UK central bank has only been prepared to lend at penalty rates to ensure it did not reward institutions for being reckless. British banks with European operations have been able to take advantage of the ECB's liquidity injections.

The three-month sterling inter-bank rate continued to fall, dropping to 6.31 per cent from a high of 6.9 per cent earlier this month. British banks have been hoarding cash to make sure they have enough to fund investment vehicles and other potential obligations caused by the credit crunch. But banks report increasing appetite for commercial paper issued by their vehicles as money market funds get to understand the assets contained in the funds.

The Bank of England's auction of three-month liquidity produced no takers on Wednesday. Banks may have been squeamish about being identified as borrowing from the facility, but most thought the lack of take-up indicated that lenders were in good health. Shares in banks that had caused the most worry surged yesterday, with top riser Alliance & Leicester gaining 8.5 per cent. Rec-riminations about the Northern Rock crisis continued. The British Bankers' Association wrote to the Chancellor, Alistair Darling, calling for a review of how the Bank of England's power as lender of last resort is used. The letter also said the Bank should change the rate for its standby facility and the eligible collateral that banks could put up.

The BBA added that the UK's influence on changes to regulation in Europe and internationally could have been damaged by the regulatory confusion that led the Treasury to guarantee Northern Rock's deposits.

Northern Rock rose for a second day on renewed belief the ailing bank could be sold. Moody's, the rating agency, said the stricken lender's mortgage book was good quality and would be attractive to a buyer. Moody's also said Alliance & Leicester and Bradford & Bingley had enough assets to use as collateral if liquidity was short. RAB Capital, the hedge fund that bought into Northern Rock last week, increased its stake in the mortgage lender to 6.05 per cent.