Bank of England Loaned 1.6 Billion Pounds at 6.75%

The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market.
The money loaned at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower or borrowers.
The pound fell after the announcement on concern U.K. lenders are finding it harder to borrow money. The Bank of England hasn't auctioned any additional money or changed any of its lending rates, unlike the Federal Reserve or the European Central Bank.
``When people tap into this facility, it can mean only one thing: liquidity is gone,'' said John Anderson, who manages the equivalent of $3 billion of assets denominated in pounds as head of fixed income at Rensburg Fund Management in London.
Euroclear's CrestCo, which settles trades in London, said in a statement there was a ``processing disruption'' with the Bank of England yesterday. Still, no client reported any ``settlement issues'' to the agency.
A Bank of England spokeswoman declined to comment, when asked whether the demand for funds was linked to the disruption.
Overnight Rates
The overnight interbank offered rate charged by banks for pounds rose to 6.13 percent from 5.90 percent yesterday and the three-month sterling rate increased to 6.63 percent from 6.61 percent. The pound fell to $2.0153 by 4:33 p.m. in London, from $2.0177 yesterday.
``Lending conditions are still very tight,'' said Jonathan Said, an economist at the Centre for Economics and Business Research in London. ``We will see this credit crunch unfold for a while longer. I wouldn't be surprised if we saw more emergency lending by the Bank of England.''
The loan ``is another sign that money markets remain dislocated,'' said Stuart Thomson, who helps oversee the equivalent of $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``It is month-end, and there's bound to be a need'' for finance.
The Bank of England announced the loan in its daily report on money market operations in London today. Fifty-seven banks are eligible to tap the standing lending facility.
Standing Facility
Bradford & Bingley Plc spokeswoman Siobhan O'Shea said the Bingley, England-based bank didn't use it. Barclays spokesman Alistair Smith, HSBC spokesman Richard Lindsay, Deutsche Bank AG spokesman Ronald Weichert and Commerzbank AG spokesman Maximilian Bicker declined to comment.
Royal Bank of Scotland Group Plc spokeswoman Carolyn McAdam, HBOS Plc spokesman Mark Hemmingway, Lloyds TSB Group Plc spokeswoman Kirsty Clay, Northern Rock Plc spokesman Brian Giles and Alliance & Leicester Plc spokesman Stuart Dawkins declined to comment.
The standing facility allows banks to borrow unlimited funds from the central bank at 1 percentage point above the benchmark interest rate, currently at 5.75 percent. The bank repeated that its standing facilities are available every day.
The facility has been tapped 19 times since the middle of 2006, according to the Bank of England Web site. Only four of those loans were for more than 1 billion pounds.
The biggest use of the facility to date was when banks borrowed a total of 5.93 billion pounds over three consecutive business days June 28 through July 2.
Sign of Stress
``It's clearly more of a sign of stress than stability,'' said Andreas Meurer, head of global fixed-income strategy at Deka Investment GmbH, which oversees the equivalent of $260 billion in assets, in Frankfurt. ``Some banks needed cash and had to pay 100 basis points more for it, which is not a good sign.''
Losses in the U.S. subprime mortgage market have spurred a global credit crunch. Companies that depend on commercial paper, debt due in 270 days or less, face fund shortages as investors refuse to buy debt secured by assets.
The crisis has prompted the U.S. Federal Reserve and the European Central Bank to pump extra money into markets since Aug. 9 to avert a breakdown in lending. The Fed cut its discount rate on loans to banks by a half-point to 5.75 percent Aug. 17.
Investors have pared bets the Bank of England will add to its five interest-rate increase since August last year, as financial-market losses and tighter lending conditions threaten to hamper economic growth.
Economic Impact
The implied rate on the December U.K. interest-rate futures contract was 6.31 percent today, compared with 6.35 percent on July 17. The contract settles to the three-month London interbank offered rate for the pound, which for the past decade averaged about 15 basis points more than the benchmark rate.
``It's too soon to tell if these problems are going to be restricted to the financial markets,'' said Brian Hilliard, economist at Societe Generale in London. ``The Bank of England is going to be watching very carefully to see if they leak through to the real economy and start affecting growth.''
The Fed is due to announce how much it loaned U.S. banks in the past week, at 4:30 p.m. in Washington. Banks borrowed a daily average of $1.2 billion in the previous week, as the four biggest lenders sought to show support for the Fed's discount- rate cut.