British Banks Given More Flexibility on Reserves to Help Ease Credit Situation
14.09.2007
The Bank of England eased restrictions on how much cash banks can borrow to manage daily cash flow, allowing greater flexibility as the banks grapple with the credit crisis.
LONDON, Sept. 13 (Reuters) — The Bank of England on Thursday made its biggest concession yet to banks caught in the credit crisis, giving them greater flexibility on how much cash they can borrow, without penalty, to manage daily cash flow.
Britain’s central bank, which has taken mostly a hands-off approach to the crisis engulfing world credit markets, allowed banks to raise their reserves by £4.4 billion (about $8.9 billion).
More important, banks can now let their reserves target at the central bank fluctuate by 37.5 percent on either side, instead of the normal 1 percent band.
Interbank lending rates dropped after the announcement, after shooting up in recent weeks as financial institutions were reluctant to lend.
“It looks like the Bank of England is giving banks a little bit more flexibility to reflect market conditions,” said Russell Silberstone, head of the interest-rate team at Investec Asset Management. At the start of each month, banks tell the central bank what they want to hold in reserves there, an amount that should cover them for the biggest difference between the money they receive and the money they pay out.
Marc Ostwald, a fixed-income strategist at Insinger de Beaufort, said that widening the target bands meant that banks would have less pressure to use the central bank’s penalty-lending service.
Banks have not been willing to use this service because of the expense and stigma attached.
Add comment