Extra loans are to be made available to UK banks in an effort to stave off the problems seen at Northern Rock recently.
As part of a process to ensure that Britain's lenders are able to maintain their stability during the current period of global financial insecurity, the Bank of England has announced that banks and building societies will be able to bid for up to £10 billion worth of funds. The bank loans will carry a high rate of interest, at a minimum of 6.75 per cent, in an effort to ensure that the loan is used responsibly by those choosing to take advantage of the scheme.
It is the first auction of its kind in the history of the Bank of England, but officials have decided the move is a necessary one in order to shore up the lending sector and provide stability at a difficult time in the global mortgage sector. The impact of the US sub-prime collapse has had a big impact on the lending markets across the globe, leading to the credit crunch that forced Northern Rock to apply for an emergency loan from the central bank earlier in September.
This new auction by the Bank of England will keep secret the names of those banks that choose to utilise the facility, so that confidence in those institutions is not undermined in the same way as belief Northern Rock was. However, there are fears that the financial rumour-mill will soon work out which financial institutions have applied for the loans and that this information could be leaked to the press.
Such a position might then result in a further loss of confidence in the banking sector among consumers and could again see queues of people outside banks seeking to reclaim their deposits. That could discourage some banks in need of the loans from applying, some in the industry have warned.
The new loans are aimed specifically at dealing with the problems in the credit market stemming from the US sub-prime crisis and come after the Bank of England has already made £20 billion of funds available for banks to borrow for short periods to help cover shortfalls in their reserves. The central bank and the government have been at pains to insist that the money is not designed to help irresponsible lenders cover themselves following the damage in the US market.
A number of auctions along the lines of the one planned by the Bank of England have already been held by the US Federal Reserve and the European Central Bank to provide lenders with more stability as the credit crunch continues to impact on the global financial industry.