British banks lined up to borrow extra funds from the Bank of England yesterday after the central bank offered 5bn of loans to steady money markets amid panic caused by the crisis at Bear Stearns.
The emergency operation received bids totalling 23.6bn for the three-day repo money. The central bank took the surprise action because inter-bank lending rates had jumped amid increasing fears about the solvency of counterparty banks.
"The Bank will take actions to ensure that the overnight rate is close to bank rate. Along with other central banks, the Bank of England is closely monitoring market conditions," the Bank of England said.
The Bank said the demand for its funding was not exceptional but the clamour unnerved some observers, who were already alarmed at the sudden demise of Bear Stearns.
UK bank share prices tumbled as investors feared that a British lender could be hit by a similar crisis in confidence to the one that hit the US investment bank. Other banks cut off funding to Bear Stearns last week, forcing it into a liquidity crisis despite its protestations that it was in good health.
The sell-off in the UK was led by HBOS, whose shares fell 12.8 per cent, followed by Barclays, down 9.4 per cent, and Royal Bank of Scotland, which fell 8.7 per cent. Fearful investors homed in on banks that tap the wholesale markets for funding, like HBOS, or which have apparently low levels of equity to assets.
Alliance & Leicester and Bradford & Bingley also fell, but investors took comfort from their earlier statements that they had funding in place until next year.
The cut-price sale of Bear Stearns for a fraction of its book value has shocked the markets and made a mockery of investors' assumptions about how to judge a bank's value. The bank's fall has shown how fears about liquidity have turned to doubts about lenders' solvency as asset prices continue to fall.
A fund manager who invests in financial stocks said: "We are in panic mode. Bear Stearns went from being in pretty good shape last week, according to the company, to going bust."
UK banks have tried to reassure investors that their exposure to US markets is minimal and that their assets are of high quality. But Bear Stearns, like Northern Rock before it, has shown the danger of fears becoming self-fulfilling as nervous counter-parties pull their lending to banks perceived to be in a precarious position. …