Pressure is mounting on the Bank of England to lend billions of pounds to the money markets for terms of at least three months to prevent what traders describe as an unprecedented market collapse. Traders said bankers were so fearful of extending cash to a possibly insolvent counterparty that lending for anything longer than overnight, even when backed by high quality collateral, had nearly halted.  Insecurity is so great that the cost of banks’ unsecured borrowing from each other for three months, the sterling Libor rate, rose on Thursday to 6.27% compared with 5.70% just before the Lehman Brothers collapsed 10 days ago. The weight of money looking for a home sent overnight money market rates to below 2% on Wednesday against an official Bank rate of 5%. Banks deposited nearly £6bn in a low interest facility with the Bank of England rather than lend to each other. The facility has been rarely used since its creation in 2006, and never for more than £1bn. On Sept 22, £9.47bn was deposited and £5.9bn the next day. On Wednesday, when the Bank drained a further £10bn of reserves, deposits were £35m.

This entry was posted by Gwen Robinson on Friday, September 26th, 2008 at 5:30 and is filed under Capital markets. Tagged with bank of england. Edit this entry.