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Barclays admits borrowing hundreds of millions at Bank's emergency rate

London Guardian | August 31, 2007
Ashley Seager, Larry Elliott and Julia Kollewe

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."

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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