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UK banks hit by credit fears

The City was swept by rumours today that another British bank was in trouble after Northern Rock indicated it was not the only bank borrowing from the Bank of England's rescue fund.

Northern Rock has borrowed only £18bn of the £23bn lent by the Bank of England from its emergency loan fund leading to speculation that other British banks need £5bn of extra funds to cope with the global credit crunch.

The chairman of the Newcastle-based bank confirmed the level of borrowing from the central bank was below £20bn in an interview with the Newcastle Journal. Sources close to Northern Rock indicated the figure was closer to £18bn as the need for borrowing in the last few weeks had been lower than the scramble for funds in the immediate aftermath of the bank's near-collapse in September.

While there may be technical reasons for some banks drawing on the Bank of England's funds overnight, most experts said the scale of the borrowing indicated one or more banks was using money from the central bank to prop up their businesses. Banks would only borrow from the Bank of England if they had exhausted other sources of credit as it insists on charging a penal rate of interest and only accepts the highest grade collateral, usually government bonds.

Barclays was today the subject of intense speculation in the City after its share price sank by 6% as investors worried about its financial stability. Shares in Barclays, which generates £4 of every £10 in profits from its investment banking and fund management businesses, fell as much as 8% at one point to hit a two-and-a-half year low over fears about funding problems and speculation it was secretly predicting a dip in profits.

The Bank of England declined to comment on Barclays, but said it had not made any emergency loans via its rescue fund on Thursday. Barclays, which issued its latest trading update just three weeks ago, declined to comment. Stockbroker analysts said the bank was busy paying cash to its shareholders in the form of a share buy back programme, which would be hard to justify if it was borrowing from the Bank of England at a penal rate.

Barclays's head of retail operations also spent £700,000 of his own money yesterday to buy 127,000 shares. Other banks, including Royal Bank of Scotland and Alliance & Leicester, also suffered large falls in their share prices as the City share dealers scouted around for the most likely candidates.

Banks have suffered a week of volatile share trading as their US counterparts revealed further losses from the US sub-prime lending crisis. Merrill Lynch parted company with its chief executive this week after the bank was forced to write down liabilities of almost $8bn (£4bn) as many of the mortgage assets on its books turned out to be almost worthless.

British banks have so far revealed only minor losses from the sub-prime crisis in the US, but have been caught in the resulting credit crunch which makes it difficult for them to borrow money. Northern Rock informed the chief City watchdog in the middle of August that it could run out of cash following the credit crunch. It almost collapsed in mid September after news that it was seeking rescue funding from the Bank of England caused savers to withdraw cash. It is understood almost £5bn in savings was withdrawn from the bank.

Figures released by the Bank of England yesterday showed that total borrowing from its rescue fund had reached £23bn. The scale of the borrowing sparked speculation that Northern Rock could find itself needing as much as £40bn when the penalty rate facility expires in February. In an apparent bid to quash further speculation the bank's new chairman, Bryan Sanderson, said its total borrowings were less than £20bn and unlikely to top £25bn. He also warned that jobs cannot be guaranteed as the bank heads towards an "increasingly likely" sale.

Mr. Sanderson, a former chief executive of Standard Chartered Bank, stepped out of retirement to take over from the ex-chairman, the science writer Matt Ridley. Mr Ridley resigned last month after a parliamentary Treasury select committee hearing during which he was accused of allowing the bank to borrow funds on the international money markets without considering the financial consequences.

Source: The Guardian
Date: 07.11.2007 [134]

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