Credit Crunch: British Banks Go To ECB In Frankfurt

THERE’S been a bit of a puzzler in The City over the past few weeks. Yes, it’s all this credit crunch thing again. If, as we are told, banks aren’t lending to each other any more, if commercial paper isn’t getting rolled over (both of which are broadly true), then why aren’t the banks lining up to borrow from the Bank of England?

Because the thing is, if you’re a bank, you really do need to have the money. In the short term it doesn’t matter what you have to pay for it: you’ve simply got to have it and damn the price. If you don’t balance your books at the end of the day, if you don’t get the money from somewhere, then you’re bust, after all. Looks like we’ve found the answer:

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.
…
“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.

“Nobody wants to take up the Bank of England’s three-month tender because of the stigma. They will be punished immediately by the markets,” he said.

While the Bank of England says it will not publish names, there are concerns that the British press will unearth the story somehow. It is safer to stick to Frankfurt, where the ECB does not even reveal the nationality of banks coming to the window – masking the picture.

The German press has reported that Barclays Capital in a major borrower at the ECB tenders. The bank has declined to comment.

While this may sound good, there’s no crisis because the banks are getting the money they need at a price they’re willing to pay, it does pose a larger problem for the future. At the moment, bank regulation and oversight, including the level of interest rates, is all to do with three parties. The Treasury, the Financial Services Authority and the Bank of England. Part of being able to oversee and control the wilder excesses of the banks is being able to control how much money they can get hold of and at what price: it’s the key way that interest rates are set, for example.

If the ECB is now acting as such a lender, it’s not so much that the BoE is independent, as claimed, as it is impotent.

Anorak

Posted: 2nd, October 2007 | In: Money Comments (2) | TrackBack | Permalink