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Barclays admits borrowing
hundreds of millions at Bank's emergency rate
Ashley Seager, Larry Elliott
and Julia Kollewe
London
Guardian
Friday Aug 31, 2007
Barclays
has been forced to borrow hundreds of millions of pounds from
the Bank of England's emergency lending facility for the second
time in a fortnight, it was revealed last night.
In a hurried and emotive statement after London's markets had
closed, Barclays attempted to calm fears that it faces a cash
crisis. Rumours had circulated all day that Barclays was forced
to go to the Bank of England after the central bank said it had
lent £1.6bn at its penal rate of 6.75%. It is thought that
Barclays borrowed the entire amount.
Barclays said: "There are no liquidity issues in the UK
markets. Barclays itself is flush with liquidity. In these challenging
times the dramatisation of such situations is of no help to markets,
their members or their customers."
The high street bank, which also has a huge investment banking
division, said it needed cash only because of a "technical
breakdown" in the UK clearing system, through which all the
major banks settle their books at the end of the day. Its shares
fell 2.5p to 597.5p, raising questions over its £45bn bid
to take over the Dutch bank ABN Amro. In its statement, Barclays
said: "The Bank of England sterling standby facility is there
to facilitate market operations in such circumstances. Had there
not been a technical breakdown, this situation would not have
occurred."
(Article continues below)
The
standby facility is usually used a couple of times a month but
the size of the loan, and the fact that this is the second time
within two weeks that Barclays has gone to the Bank of England,
have raised eyebrows.
Barclays' appeal for calm follows days of speculation about the
bank's exposure to losses in asset-backed security markets.
Edward Cahill, the banker in charge of collateralised debt obligations
at Barclays Capital, resigned last week, and others in his department
are understood to have departed. The best known is John-Paul Parker,
who is credited as the inventor of "SIV-lite", the controversial
structured investment vehicles at the centre of the worries in
financial markets.
Barclays has failed to explain Mr Cahill's resignation but the
bank's claim that its potential losses from exposure to SIV will
be as little as £75m has been greeted with scepticism.
"£75m is a bad month at Barclays Capital. It's not
a resigning matter," one credit market operator said.
News that the Bank of England emergency lending facility had
again been tapped hit sterling. The pound slid to just over $2.01
and to 232 yen though it held its own against the euro at 67.7p.
Money markets remained tense last night as the credit that oils
the wheels of the global banking system remains all but dried
up. Banks around the world have become reluctant to lend to each
other after suffering big losses from the US sub-prime mortgage
crisis.
Nick Parsons, head of strategy at nabCapital, said: "Every
institution is potentially guilty until proven innocent. With
incomplete disclosure and a lack of transparency, those holding
cash are unwilling to lend it for other than extremely short periods
and then only against the highest quality collateral."
The US Federal Reserve and European Central Bank have flooded
money markets with cash for short-term loans. The Fed two weeks
ago opened its "discount window" whereby it cut the
interest rate at which it lends to banks in the money market for
periods of up to 30 days.
The Fed's chairman, Ben Bernanke, assured investors that the
central bank was monitoring the situation and would act to contain
the crisis. There was speculation last night that the Fed may
cut its main lending rate from 5.25% before its next meeting on
September 18.
The stress is showing when banks want to borrow for three months
or longer. The 3-month Libor (London interbank offered rate) leapt
from 6% to 6.6% in mid-August and has remained there. Traditionally,
3-month Libor is about 0.15% above the base rate, which is at
5.75%. Now it is almost one percentage point over the base rate.
One analyst, who declined to be identified, said: "The interbank
market is not working well at all. It's in a persistent state
of dysfunction."
Diana Choyleva, of Lombard Street Research, said: "Our estimates
show that bank losses could reach $300bn."
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