Borrower draws emergency loan from Bank of England

Section:

By Stacy-Marie Ishmael and Gillian Tett
Financial Times, London
Tuesday, August 21, 2007

http://www.ft.com/cms/s/0/a2175b7a-4fcf-11dc-a6b0-0000779fd2ac.html

The Bank of England said it made an emergency £314 million loan to an unidentified party on Monday through its standing facility, which allows banks to borrow unlimited amounts at a penalty rate of 6.75 per cent.

The UK base rate is 5.75 per cent. It is the first time the facility has been tapped since the onset of the liquidity crisis in financial markets, the Bank said.

A spokesman for Northern Rock, which has been at the centre of liquidity concerns, said it had not used the facility.

The BoE's move is likely to attract intense interest, given the current level of market anxiety, and could provoke speculation about why any borrower would choose to fund itself at a rate above the prevailing market levels.

In particular, there is widespread debate in the financial world about the degree to which funding problems in the commercial paper market may be creating liquidity challenges at banks.

"This isn't necessarily a huge deal. If we weren't in this sort of market environment, this wouldn't have raised the level of interest that it has," Tom Jenkins, banking and financials analyst at the Royal Bank of Scotland. "It's interesting that it happened at this point, but it doesn't automatically suggest there is a wider crisis in the making."

The Bank of England has always stressed in its monetary policy framework that it does not wish the market to consider the use of the standing facility to carry a stigma, and banks have tapped the window on a fairly regular basis in the past when they have faced short-term issues in their liquidity management.

The Bank's framework has hitherto contrasted with the monetary system in the US, where the use of the window has traditionally carried such a high stigma that banks have gone to great lengths to avoid using it.

While other major central banks -- including the European Central Bank and the US Federal Reserve -- have acted to inject liquidity into the financial system to ease lending conditions, the Bank of England has so far not intervened by taking any unusual measures.

However, the standing facility is open to any participants in the market, if they require them, and officials at the Bank have drawn up a list of additional measures that they may implement if the overnight rate in the sterling money markets remains high for an extended period.

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