Credit Crunch – UK Banks Bypass the Bank of England

| October 4, 2007

As I mentioned yesterday, I was eagerly running down information on something I had caught wind of – that banks in the UK were in a liquidity crunch to cover their positions, and rather than go to the Bank of England to get more money they were instead turning to the EU central bank.

Now it seems the UK Telegraph put together details on this development

British banks gorge on ECB’s cheap credit

British lenders are shunning the Bank of England and turning instead to the European Central Bank on a massive scale, taking advantage of much lower interest rates and guaranteed anonymity to weather the credit crunch.

Seems one of the big concerns was any disclosure that they were having to borrow vast sums of money to shore up their shaky financials. They were worried that word would get out, and a repeat of the mess at Northern Rock would take place.

EU sources say Britain’s banks have been clamouring for money in Frankfurt, accounting for a substantial chunk of the €190bn (£132bn) lent last week in the ECB’s variable tender operation. “It is fair to say they have been borrowing from the ECB on a very large scale. It’s cheap, so why not,” said one official.

“There’s been a huge amount of borrowing. It is causing movements in the euro-sterling exchange rate that do not make any sense otherwise. It is why the pound shot up in early September when the liquidity crisis was in full swing and there was nothing to justify this,” he said.

“The money markets may look as if they are functioning again in Britain, but in reality they are not,” he said. Mr Redeker believes the key motive in going to Frankfurt is the certainty of secrecy, rather than the lower interest rate.

So at the moment everyone in government and finance are working hard to show everyone that things are working fine, and there is no reason for concern. Just behind the curtian, things are still spinning out of control. This is a story that will unfold overseas an especially here in the US. It will take months if not years to happen. Think of it as a process rather than an event. The bottom line is the biggest banks in the world are holding billions of bad or semi-bad investments off balance sheets. This is having the effect of sucking money out of the system as these bad investments implode. Because it is off balance sheet there is no public way to instrument just how bad it is or will get. Banks know this, so they have no idea who is a “zombie” right now – dead but don’t know it, so they are refusing to lend to each other. This is why the central banks are having to step in and take the role of lender of last resort.

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Category: Credit Backlash, Economics, Geopolitics, Main

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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