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LIBOR ouch!

Robert Peston | 13:30 UK time, Wednesday, 26 March 2008

Three-month sterling LIBOR, the interest rate off which our mortgages and most other loans are priced, has risen to 6%, its highest level since December 28.

Bank of EnglandIt shows that banks are still hoarding cash, still refusing to lend to each other, because of their concern that money is perilously tight for all banks.

The fundamental cause of this stress in the banking system hasn’t changed in months: it’s that the banks remain unable – as Mervyn King told the Treasury Select Committee this morning – to raise funds in the way they had been doing by selling off mortgages or other assets in the form of bonds.

What does it mean?

Well the cost of credit for all of us is still on the rise. That’s true for those with mortgages. It’s true for companies needing to borrow.

And it means that bankers will remain anxious about the stability of the financial system.

They will however breathe a sigh of relief that Mr King confirmed what I disclosed in my BBC blog last week, that the Bank of England is examining how it might allow banks to exchange mortgages and other illiquid assets for loans from the Bank of England, to compensate for the closure of asset-backed bond markets.

He outlined two sensible conditions for the provision of these funds:

• The Bank of England’s money should not be used by banks to fund future incremental lending, but only to allow them to meet their pressing current financial commitments

• And the banks should retain 100% liability for any potential future losses from the assets they may pledge to the Bank of England in exchange for liquid funds

Or to put it another way, Mr King is still insisting that taxpayers should not pick up the bill, if the economy turns down so sharply that banks start to suffer serious losses on their mortgage lending.

Comments   Post your comment

How do you stop displacement effects allowing these liquidity injections to filter into future incremental lending? Unless the banks are not allowed to lend a penny if borrowing through this window, then any money they obtain from the central banks is going to enable banks to continue lending.

  • 2.
  • At 01:48 PM on 26 Mar 2008,
  • J McGee wrote:

it is extra-ordinary that such crass/reckless lending should be bailed out

Its about time the Bank of E got their finger out!

Too many people responding to these bloggs are solely concerned with blame!

If the BoE does not and will not lend a hand - we are all in trouble; no matter who or what ''caused'' it.

Imagine the great fire of London where a bunch of people were all standing together arguing about who caused it - whilst London burnt!

Thankfully that fire was extinguished (que the BoE) The argument over who/what caused this crunch can be argued over for the next few decades - but at least lets get the fire out first!

Anyone that believes this will not directly affect them is missing something!

  • 4.
  • At 01:51 PM on 26 Mar 2008,
  • FR wrote:

Well, at least Merv is showing some balls (in public, at least) by "insisting that taxpayers should not pick up the bill, if the economy turns down so sharply that banks start to suffer serious losses on their mortgage lending." It's his job to be optomistic and to 'look out for the taxpayer'

Of course, once the shtf and our economy catches up with the US downturn (downturn is putting it mildly), all these brave words will go out the window in a flash. All major high street banks will be bailed to the tune of hundreds of billions, if not approaching trillions.

Spin, spin, spin.

  • 5.
  • At 01:51 PM on 26 Mar 2008,
  • Andrew H wrote:

If the banks still pick up the tab for the pledged assets going bad, and the new liquid asset injection is only to help meet current obligations, then in what way does this aleviate the situation, except so far as short term liquidity goes? Indeed, if current indicators are to be believed, current liquidity is not an issue at all, except for the stupid banks who have fundamentally misjudged the funding for their business. The real problem is that banks may have paid a whole load of money for a bunch of assets which really aren't worth a lot. Now the music has stopped, everyone is struggling to find a chair. Indeed, they are all stacked on top of each other, to extend (confuse?) the metaphor.

The bottom line is that a whole load of people are going to have to go through some pretty bad short-medium term pain in order to achieve longer term stability. In other words, as a country, we've picked the rapids whereas, perhpas, the US has picked the smoother route straight to the waterfall. We both go down the same amount, but the question is in what state we reach the bottom.

My biggest concern is that the banks still appear to want us to go the waterfall route, and seem to be oblivious to the danger in doing so.

Good on the BoE for not writing blank cheques to bail the banks out. I know that if things go badly wrong for the banks it will hurt us all, but I think if the BoE started bailing banks out - that would hurt us as well - in the long run


great blog Robert

  • 7.
  • At 02:06 PM on 26 Mar 2008,
  • phil wrote:

How can the MPC reduce base rate when King forecasts CPI will rise to 3%, and real inflation will probably hit double figures soon?

Will reductions to BoE base rate have ANY effect whatsoever on LIBOR, or high street banks saving and loan rates?

What reward does King get for making statements such as that house prices will be 'broadly stable', which he knows to be 'economical with the truth'?

  • 8.
  • At 02:26 PM on 26 Mar 2008,
  • lee wrote:

The banks probably aren't that fussed about lending to each other. It's just that they would probably prefer to borrow from the Bank of England, as they get a better deal. And despite what the BoE say now, they will probably dump any bank problem bills in the future straight to the tax payer. Because of the Rock, other banks know this and will do what they always do - suck all the money they can out of the situation.

  • 9.
  • At 02:26 PM on 26 Mar 2008,
  • Bryan wrote:

Lets all hope that Mr King sticks to his conditions for accepting the 'assets' in question in return for taxpayers' money.
The western central banks are in danger of becoming 'toxic waste dumps' at the prompting and pressure of banking and investment institutions. Only so much of this is acceptable before credibility of the central banks is seriously impaired.

  • 10.
  • At 02:27 PM on 26 Mar 2008,
  • Ian Harris wrote:

This post just highlights how little confidence banks have in each other at the moment.

There is a huge information gap out there and until this gap is filled by a full disclosure of exposures to various structured finance vehicles; the banks assets compared to loans outstanding and just how much cash banks have it isn't going to get much better.

There seems to be a huge game of "chicken" going on in the finance markets to see who will blink first.

Will the Bank of England be forced to cut interest rates by more than 0.25% at a time?

Will inflation ease allowing the Bank more room to manoeuvre or will it rise again giving them no room to move?

Will Alistair Darling blink and act to ease the situation?

Just what is going to happen to commodity prices notably oil and by definition the price of petrol and diesel at the pumps and also common food stuffs?

The truthful answer is that no one really knows. Some people are no doubt sitting on very exposed options looking to make, or possibly lose, a fortune over the next few months.

I fear we are in for much more bad news than good news this year.

  • 11.
  • At 02:30 PM on 26 Mar 2008,
  • Nick wrote:

How long before the Bank of England and the Treasury confess to the public that this credit crunch has been mainly caused by irresponsible lending, the large majority of which is mortgage lending that has gone into overpriced housing. The greed of the public and the banks over the last 6 years has ended up making the majority of housing in this country unaffordable and pricing young people out of the housing market and the security to raise a family in a dwelling that is not going to change at the whim of a landlord. This housing greed has brought the worlds financial markets to a standstill to the point where we are now looking over the precipice to recession and possible depression. The only way that this mess will be fixed is for house prices to return to normal levels in-line with salaries and for people to stop thinking they can make "free money" out of investing large quantities of "borrowed" money in housing. Ultimately someone has got to pay for it and in the end it is going to be painful one way or the other.

  • 12.
  • At 02:39 PM on 26 Mar 2008,
  • Russ wrote:

The BoE's conditions are nice in theory but will fail in practise. The UK taxpayer will be liable unless they insist on greater collateral than the loans issued. Otherwise if the borrower goes bust the bank is left holding the loss.

  • 13.
  • At 03:46 PM on 26 Mar 2008,
  • Ian Slater wrote:

RPI is rising at an annual rate of 4.1%, so 6% cash leaves only 1.9% real. Meanwhile Mr King is already suggesting even the bowdlerised CPI figure may hit 3%. Surely the problem is that even though interest rates are too low, the banks unwisely bet on them going even lower?

  • 14.
  • At 03:52 PM on 26 Mar 2008,
  • Colin wrote:

The level of toxic waste in the system must be so great that the banks look at their own book and then presume that the other banks have the same level of bad and doubtful. Only a recovery in asset prices will sort this mess out and thaat requires funding, hold on to your hats!

  • 15.
  • At 03:52 PM on 26 Mar 2008,
  • Charles wrote:

Whilst many seem to take pleasure in seeing financial institutions undergoing liquidity problems - the reason that they may receive support is try and stop this becoming (even more of) a systemic problem.

When people talk about reckless lending do they mean lending to UK mortgage holders, UK credit card holders, UK businesses? These will be the groups who ultimately suffer if banks stop lending to each other and credit continues to get more expensive.

It is time to get real about the impact on the housing market if mortgages really become difficult to get hold of.

How many will be rubbing their hands with glee at the bank's problems then?

  • 16.
  • At 03:52 PM on 26 Mar 2008,
  • harry e wrote:

$1.2 trillion in bad debts globally according to Goldman yesterday.

Assuming lending has to go onto balance sheets now and that Basel capital adequacy ratios apply, wiping out $1.2 trillion of capital will constrain existing lending capacity of the order of $12 trillion.

I don't think most people have a concept of what those numbers in isolation actually mean. To put it into perspective, total UK household debt is about $2.8 trillion. The total value of US housing is about $14 trillion. The total value of all US banks is about $1 trillion. So yoiu can see $12 trillion is not a trivial reduction.

Asset prices (houses and stocks) will collapse if lending capacity is reduced that much. That could lead to higher levels of default...that's where the central banks come back in.

  • 17.
  • At 04:12 PM on 26 Mar 2008,
  • Ian Miell wrote:

I'd like to second all the comments praising the Bank's refusal to write a blank cheque to these deadbeat banks.

Why it should be one rule for them (free and easy money on demand) and another for the consumer (overdrawn for one millisecond? pay up your charges, you are now credit risk!) has not been explained.

I've never been charged by a bank for any financial misdemeanour but how they can justify the double-standard is beyond me. Perhaps the BoE could implement a billion-pound "administration fee" whenever the banks get any help?

  • 18.
  • At 04:19 PM on 26 Mar 2008,
  • John E wrote:

Someone, somewhere needs to start unpicking these CDOs that seem to be all the banks have left as security. Until the true risk is known, and the toxic waste is sorted from the sound paper, the financial system will remain stalled. Sorting the problem out will take resources and time, but the longer the wait, the worse the problem will become and the more damage the global financial system will sustain.

  • 19.
  • At 04:25 PM on 26 Mar 2008,
  • Mike wrote:

The banks (commercial and investment) got themselves into all this trouble through greed. Now they expect help from the BOE (and the taxpayer). The banks should be left to sort out their own mess, whatever the worse case scenario.

  • 20.
  • At 04:27 PM on 26 Mar 2008,
  • Kevin Anthoney wrote:

How much collateral are the banks expected to put up for these loans? Is it a pound of security per pound borrowed, or is the Bank of England factoring in the possibility of the mortgages losing value by making the banks put up more for their loans?

  • 21.
  • At 04:45 PM on 26 Mar 2008,
  • al s wrote:

The banks need to de-leverage and fairly quickly. They need to swallow some serious pain and this is where the BoE can help. I agree that King should resist calls to hand out cash but he could use the back-stop of the BoE to extract serious concessions from the banks including ridding themselves of the huge counter-party risk that they carry.

Perhaps Robert could blog a little on the nature of the derivative risk and the impact of the hedge-fund activity in the markets. This is where the hidden risk lies that brought down Bear.

  • 22.
  • At 04:46 PM on 26 Mar 2008,
  • adam wrote:

balance sheets need to deflate by about 30-40% in order to get to a level where valuations become sensible. this would mean equity values need to come off by a similar amount before order and calm can properly be restored in the markets and lending can start again in earnest.

  • 23.
  • At 04:51 PM on 26 Mar 2008,
  • Paul wrote:

LIBOR @ 6%
BoE @5.25%
Any idea who's making a killing in the 75 basis points inbetween Robert?

Isn't it an illustration of the current madness that the marginal cost of lending on my two year old offset mortgage is cheaper than LIBOR? Given my mortgage is currently charging 5.74% I'd love to offer my available funds into the LIBOR market and make some cash!

  • 24.
  • At 04:58 PM on 26 Mar 2008,
  • Graham Found wrote:

The reliance on consumers driving the economy by spending was bound to have an eventual cost. Consumer spending is still outstriping inflation. This false internal loan driven economy was bound to end in tears so why is everyone acting so suprised?

  • 25.
  • At 05:05 PM on 26 Mar 2008,
  • Derek Griffiths wrote:

I totally agree with all the comments particularly #15.

Why does BoE continue to service banks' bad debts and encourages 'irresponsible lending' when banks took the risks and now should pay the price. Why does the taxpayer bail out the banks?

Either nationalise the banks or charge them an unauthorised overdraft that will pay for critical services such as Education and Health.

When banks make profit, they don't share it with Government so why does Government underwrite their risky asset? Clearly BOE have a double policy; one for Northern Rock and one for current climate.

  • 26.
  • At 05:57 PM on 26 Mar 2008,
  • Ray Tilley wrote:

Not surprised that LIBOR rates are climbing despite recent cuts in Base Rate. I'm busy pulling my dosh out of accounts paying a miserly 5.25% where it's been for years and finding no shortage of better homes for it yielding 6.25% to 6.76%. I expect there's a few million people doing the same. If Mr King and the MPC make further cuts in Base Rate are they in danger of losing control of Monetary Policy?
Ray, Weston-super-Mare

  • 27.
  • At 06:47 PM on 26 Mar 2008,
  • Tim C wrote:

Modest Proposal

Tell the UK Banks that they must do their part like any other business faced with a cash shortage / dodgy balance sheet. Raise more capital. Say £100bn should be the target and in short order too. Otherwise no more support from B of E.

  • 28.
  • At 06:54 PM on 26 Mar 2008,
  • Neil wrote:

Ian Post #15

To respond to your comment and I hope this doesn't sound rude, but you aren't exactly important. If you file for bankruptcy tomorrow it won't really effect that many people. However if a bank such as RBS collapses tomorrow and it wasn't saved, the whole banking industry could possibly collapse. Why you might be asking? Well banks trade huge amounts with each other and if a bank goes down then it is likely to not be able to repay its debts, which then causes a knock on effect throughout the whole sector.

Again you might be thinking who cares if the banks collapse, those greedy buggers?! Well Charles Post #13 explains, if the banking system collapses then we all suffer. Business won't get money to invest in projects, individuals won't get mortgages etc...the whole economy would collapse.

Does it all make sense now?

  • 29.
  • At 07:01 PM on 26 Mar 2008,
  • Rude Boy wrote:

How ever it gets dressed up the simple fact is that the banks are worried about running short of money.
They are like junkies fretting about where their next fix will come from.
They are used to being able to pay their overheads and bonuses from the difference between the rates what they can borrow at and the rates that they can lend at.
Quite simple.
All the banks in all the countries are getting nervous about being caught short though. Who can blame them if they want to hold tight onto the money they have?
That behaviour does not pay the bills though.
This is where Mervyn comes in. He has access to a bottomless pit of money and the bankers want it.
It does not matter that every billion he lends dilutes the money already in circulation. The bankers need it. They need their fix now.

If any other group of citizens wanted money then they would be given short shrift and told to leg it or get on their bike (Remember that?) and get another job.

Bankers are different though.
What else can they do?
They know how to bank and that's about it.

So Mervyn will give them their money to keep them off the street and eventually the system will correct itself.
Galloping inflation and lack of work in the real economy will bring down the value of wages - and houses - to levels where we can again compete with Chinese and Indian labour.

The jobs at Jaguar will indeed be safe after all.

The bankers meanwhile will still be moaning about the competitiveness of the workforce.

  • 30.
  • At 09:00 PM on 26 Mar 2008,
  • Jon wrote:

Here is an idea let the Banks borrow from the Central Banks but instead of using mortgages, issue additonal shares (a rights issue in-effect) of the bank that are held by the BofE. Redemable when the loan is cleared.

Win-win, BofE provides cash that is needed, earns money in form of dividends for HMG and more importantly this mechanism should not induce the scourge of Moral-Hazard as it should concentrate the mind of the Bank's Board of Directors to resolve liquidity issues.

  • 31.
  • At 09:04 PM on 26 Mar 2008,
  • alan wrote:

The truly, madly, deeply screamingly insane part of these loans is that Mssrs Brown and Sarkozy do not make this lending contingent on the full disclosure of the extent of the "off balance sheet" and other funny money stuff that is causing this problem anyway.

Earlier this week these leaders made a statement that this data should be disclosed, rightly so. How can it be that the BoE and the European Central Bank that have been making these loans do so without asking for this data?

On a simplistic level it is like J Public asking for a loan saying "I don't know how much I owe, lend me anyway".

More concerning are thee other possibilities:
1) The banks actually do not know.
2) They do know but will not let on , because it is so much it will trigger an avalanche of other Northern Rocks.
3) Our elected leaders are actually powerless to require this information, when threatened by the might of the retail lenders.

  • 32.
  • At 09:34 PM on 26 Mar 2008,
  • Emile Wakefield wrote:

I’ve just been onto the Bank of England’s web site and downloaded their 2007 annual report.

I am no accountant that’s for sure, but I am perplexed by this whole so called ‘credit crunch’ situation. Please, I ask again, as I have in a couple of other posts, could someone, anyone, please explain it all to me…

The annual report can be found here at

On page 35, there is a summary combined balance sheet. It basically says that the banks total assets (including loans and advances by the way) are £77.763 Billion, total liabilities are also £77.763 Billion.

Now, being a simple minded chap, I interpret this as meaning, the things it ‘owns’ (including loans made to others by the way) are equal to £77 billion, and the things it ‘owes’ are also equal to £77 Billion.

So, if you wound the organisation up, it would neither own, or owe, anything.

This is where I am I think being dumb, but, to me, that means, I think, that it’s net value equates to zero.

My big question is this then….

Where is the money that it is lending to the banks to bail them out of this credit crisis ?

Is it borrowing it from elsewhere to lend to the banks ? if so, where is it borrowing it from ?

If not, is it just making the money from nowhere, on the assumption that the tax payers will cover the loan it is making ????

Please, somebody, help me, because I can’t get my head around this. The Heisenberg Uncertainty Principle yes. This stuff, no !

This is a good article in my opinion…

To make the world right we don't need weapons, we need an honest money system.

  • 33.
  • At 11:24 PM on 26 Mar 2008,
  • Rob wrote:

Don't you just love these capitalists?

Marconi? 'Bad leadership and reckless investment and therefore it must go to the wall'.

Northern Rock (and most other high street banks)? 'Bad leadership and reckless investment and therefore must be bailed out by the TAXPAYER'.

Let the weak go to the wall or the result will be ever higher risk taking with ever higher bonuses paid to gamblers when things go well and ever higher costs to the TAXPAYER to bail them out.

And depositers must NOT be bailed out either (other than the £35k guarantee) - they have to learn that there is an ever higher price for this madness.

  • 34.
  • At 11:49 PM on 26 Mar 2008,
  • Nick Gotts wrote:

A question I haven't seen asked here (pardon me if I've missed it). Given that as Graham Found (#23) says:
"The reliance on consumers driving the economy by spending was bound to have an eventual cost."
why have the UK, and US authorities allowed, and in fact encouraged, the asset/credit bubble? Well, how else do you fund an unpopular and enormously expensive war while keeping the populace quiescent? If the Afghan/Iraq war had been as easy as the neocons said (and, I believe, thought) it would be, the USA would have been in a position to subordinate Iran, manipulate the oil market to suit the US economy, keep Europe and China in line, and throw Blair, Berlusconi and Aznar some crumbs. As it is, our lords and masters are in serious trouble, and I'm torn between schadenfreude and terror.

  • 35.
  • At 01:05 AM on 27 Mar 2008,
  • mat wrote:

Things are worse than what they let on, if bank lent more than the capital they had, the tax payers should not bail them out. Monetary policy isnt working, next will be some kind of fiscal policy and we all know whos going to fund that.
Banks have made home unaffordable, no control on house price inflation has always ended up in tears. Lucky i dont have debt, no credit cards etc... only fools have those.

  • 36.
  • At 01:14 AM on 27 Mar 2008,
  • Joe wrote:

Reported the week before last.
Bear Sterns was leveraged at 31 to 1 based on cash to loan commitments.
The remainder of the NYSE is also leveraged at 20 to 1.

A 5% reduction therefore in the value of the 'real assets' held by these companies, leaves them technically insolvent.

As for the U.K. Expect one of two things. Rampant inflation with house price stagnation, or House price deflation.

Only this will re-align the earnings to average house price ratio which is well out of keel.

Personally. I suspect it will be a combination of inflation and house price correction, but, either way, it is unavoidable.

Am I missing something?

This says the libor is around 2.75%?


Is that for the US only?

  • 38.
  • At 09:13 AM on 27 Mar 2008,
  • Keith wrote:

This is not a liquidity issue, this is a solvency issue. The banks are insolvent, and that's why they can't lend to each other - they know the game's up.

  • 39.
  • At 09:16 AM on 27 Mar 2008,
  • Toby wrote:

It may well be that the tax-payer has to bail out the banks, in order to avoid a complete melt-down of the banking system and currency.

However this should only happen once:

a) The Banks shares have been completely given over to the Govt (ie nationalisation).

b) All bonuses paid to bank staff are completely stopped and salaries are reduced to civil-service type levels.

I suspect that the people bleating here about how we must support the banks or we will all suffer are in fact people who work in banking, or bank shareholders.

For any other citizen it is completely unacceptable that their money should, in effect, be used to reward those who have brought this upon us.

The government and banks should pay heed to this; A few hundred thousand people made bankrupt and homeless might not phrase things in such a dignified manner.

I bet Bob Diamond wishes his mugshot was not on the front page of the BBC Business section!

  • 40.
  • At 10:12 AM on 27 Mar 2008,
  • DaveH wrote:

#36 - Joe I think is probably right. It will as usual be the provident, who suffer with inflation, paying the price for the speculators (I include greedy folk like my neighbour and his ridiculous extension) and those, who financed them. Like the FSA, it will not be those, who have messed up, who will face the sack.

While Merv (whom I have never rated) is right to prevent the attemp[t to shift hte risk on to taxpayers, why did he not listen to those of us (me included), who have consistently said that interest rates were 0.75 to 1% too low and were only causing a dangerous bubble? Is it because the BoE is not actually as independent as Brown would have us believe? That "oops, ingflation is over 3%" letter, which Merv will be writing in June will hopefully illuminate this falsehood.

  • 41.
  • At 12:01 PM on 27 Mar 2008,
  • james wrote:

Whilst I stand to loose as much, if not more, than the next person I welcome all the termoil and mayhem.

Easy credit has hidden too many problems from view by preventing them from becoming a financial issue. I would like to see the days of easy credit disappear. Forever. Credit should not be easy to come by and only given if prudent. The cost to Joe public and companies alike is going to be painful but if we at least learn a lesson and don't go back to 'ignorance is bliss' we should all be better for it. "Considerably" better off.

At any rate. I personally hope that
1) things get bad enough that people learn an important lesson. Borrowing can be risky. Unnecessary borrowing is an unnecessary risk. Unsustainable borrowing is not an option.
2) House prices fall “significantly” and enough to make both buy to let and buy to tart up untenable options. Ironically enough this could also prevent a future credit crunch as banks won’t need nearly so much money!!
3) The country (and by that I mean Joe public) adopts a more sustainable lifestyle.
Live within your means if you can. If you can't find a better paying job or double check your definition of 'a necessity'.
4) The long term cost of this comes off the wages and mind boggling bonus's awarded to the people that earn silly money.
5) It would also be nice if politicians actually did stuff "for the people" that would actually improve everyone’s (rather than their) lives but that might be asking the impossible.

So, in answer to comment no 3. I hope Mervin sticks his finger back in. The current global business model is wrong and needs to change at all costs. I for one don't want a "strong/growing economy" if it means I pay the cost by becoming insolvent and destitute at a young, middling or old age.

  • 42.
  • At 12:55 PM on 27 Mar 2008,
  • warwick wrote:

The system is broken. It doesn't matter what the bank of england does or doesn't do. It is a part of the problem. All it can do is delay the inevitable.

We need to put these crooks and fraudsters in prison where they belong.

We need a return to one hundred percent reserve banking.

  • 43.
  • At 01:15 PM on 27 Mar 2008,
  • Liam wrote:

A Barclay's 'chief' trousers £20 million plus while the current carnage is killing people financially and it has not really started yet. Are the banks just having a laugh?

  • 44.
  • At 01:50 PM on 27 Mar 2008,
  • andy williams wrote:

Why do I have this niggling little doubt in the back of my mind that this is only going to make matters worse.

This flies in the face of aversion therapy. The banks have been naughty and we are rewarding them and not only that we're letting them continue in their naughty ways. This will only encourage them to be more naughty in the hope we will give them an even bigger reward.

What the banks in fact really need is a sharp slap across the back of the legs, sending to bed with no supper, then a talking-to with the offer of reward only if they are good and do as they're told.

This is a bad move and will end in tears all round (except for the banks)

  • 45.
  • At 03:14 PM on 27 Mar 2008,
  • Duncan wrote:

What a lot of people don't seem to realise is that when the expression
"Banks won't lend to each other"
the problem is international rather than just being between Lloyds and
HBOS (to give a UK based example).

Looking at the figures for just one country - Germany,

In 2007 Germany had a trade surplus of over £12 billion. In comparison the UK had a trade deficit of over £4 billion.

The Germans don't like credit cards. In contrast "Britain's household debt levels are the highest of any major economy in Europe or North America" according to a Telegraph article.

In conclusion for years alot of the
money people have been borrowing has
actually been coming from abroad.
The countries who have been lending it now want reassurance that it will
paid back before they lend any more.

  • 46.
  • At 03:36 PM on 27 Mar 2008,
  • Cecil Stroker wrote:

Is the bank of England in a position to resolve the issue I suspect the more money they pump into the system the more money will be held by the banks this appears to be the case in the US they have dropped rates, injected several hundred billions of dollars and effectively taken a failed bank onto the Fed Balance sheet (although JP Morgan have brought it the FED have taken Bear Stearns debt on their books), and all of this effort has yet to show that it is making any imapact on the current credit issues. I very much doubt that the Bank of England will be able to do what the Fed so far have unable to achieve. If the BOE start injecting more liquiidy are we not just bailing out the bankers and potentially putting an unbearable inflationary burden on the UK tax payer in the future?

  • 47.
  • At 05:23 PM on 27 Mar 2008,
  • Milton Keynes wrote:

If money is so hard to come by, why is M4 still going up at 12% per annum? Who is getting this money, because it's not consumers.

Growing the money supply at this rate will only end one way.... inflation. Where's my 12% pay rise?

  • 48.
  • At 05:32 PM on 27 Mar 2008,
  • Tony Whicks wrote:

What does LIBOR stand for?

  • 49.
  • At 05:50 PM on 27 Mar 2008,
  • Darren wrote:

For real? Banks want the tax-payer to bail them out? They have really got to be absolutely kidding, with how they've fleeced and treated the British Public for years with there illegal bank charges.

Let the whole banking sector rot in h*ll. They've bought it on themselves, and if the BofE bails them out, there WILL be rioting on the streets, guaranteed.

If this does happen the government better declare martial law first. I for one stand for such an action.

  • 50.
  • At 06:21 PM on 27 Mar 2008,
  • Darren wrote:

For real? Banks want the tax-payer to bail them out? They have really got to be absolutely kidding, with how they've fleeced and treated the British Public for years with there illegal bank charges.

Let the whole banking sector rot in h*ll. They've bought it on themselves, and if the BofE bails them out, there WILL be rioting on the streets, guaranteed.

If this does happen the government better declare martial law first. I for one stand for such an action.

  • 51.
  • At 09:09 PM on 27 Mar 2008,
  • Abraham Koshy wrote:

Mr. Peston, This response is on TATA. I had been an avid reader from childhood & I used to wonder why the English stories & Nursery rhymes(which had mostly British background) were filled with gory & avenge and reference to wily Step Mother’s and suffering young daughters’ of a Timid Father . In contrast, Indian stories & rhymes were more about life & its beauty and value. The discussions, I read here, represent crowd who read those stories and relive on their past. Well, one should grow up and distinguish right & wrong!! Dont be of Coloniastic mind.. It's past & World has moved on..!!!

  • 52.
  • At 10:25 PM on 27 Mar 2008,
  • Paul H wrote:

My view on the Bank of England is that it has thus far played the crisis fairly well (and probably an unpopular view) - in that it hasn't made any drastic interest rate cuts and in that respect still has some ammunition left to put out any flames in the coming months.

In any case we are heavily dependent on action taken by the Fed and you have to wonder what if any difference a significant reduction in UK Interest rates would have made to the crisis, other than provide a short term bounce in the markets. It would certainly have limited scope for any future movement.

The Government has little if any reserves to make changes to fiscal policy - leaving the bank to act in virtual isolation. The recent budget was testament to that.

Bail outs are a very tricky issue, but if it’s one that can’t be avoided then I really hope that the public demand and receive their pound of flesh once the crisis is over, more regulation and stricter lending criteria as well as a share of future profits.

This will prove a real test of the Government, whoever it is once the mess begins to clear – hopefully it will remain a topical issue at the time of the next General election rather than the usual garbage of immigration and asylum.

  • 53.
  • At 12:09 AM on 28 Mar 2008,
  • Paul wrote:

I am perplexed by the amount of venom contained in some of the comments ! The current situation affects or will affect EVERYONE who has a mortgage. People needing to remortgage after their current deal expires are suffering a significant increase in payments, indeed the percentage increase in payments far exceeds the % increase in wages over an equivelant period. This is potentially inflationary. Who is going to be happy with a payrise of 3% when their housing costs have increased by 10% plus ? Are they accusing every homeowner in the UK of irresponsible spending ! I suggest they must be because, many of the comments seem to criticise banks for irresponsible lending.Even those lucky enough to own their home outright will have had a mortgage at some stage of their life. Only the incredibly fortunate few can afford to buy a home without a mortgage. Equally how many people can afford a major purchase such as a new car from savings alone ? Do people really want to see a housing crash and the misery caused by repossession ? Who will house these people when they are evicted from their houses ? The council or housing associations ? I don't think so ! The current supply of affordable housing outstrips demand. This is why buyers have over the past few years been willing to overstretch themselves. Returning to who will house those repossesed ? It's OBVIOUS private landlords WITH BUY TO LET MORTGAGES. As their mortgage costs will have increased so will rents. These people will then claim housing benefits/working family tax credit etc. Who pays for this ? ALL you people who are rubbing their hands in glea at the current crisis and giving yourselves a pat on the back for not having any debts. Taxes both indirect and direct will need to rise to pay for these benfits. Yes there has been a degree of irresponsible lending and irresponsible spending. BUT don't stereotype all banks and all borrowers. Both the chancellor and the bank of england both need to intervene to avoid the meltdown,if necessary using tax payers money to do so. 5 billion spent now would be better than 30 billion spent to nationalise another bank ! The FSA and the bank of england could partially solve the current liquidity crisis by reducing banks and building societes free asset ratios. Yes the bank of england could accept mortgages as security for loans to mortgage companies. But this should be done to service existing need eg those people remortgaging, not those raising additional capital via a remortgage to pay off unsecured lending like credit cards that some irresponsible people have used to fund a lifestyle beyond their salaries. To recap Who does a house price cash benefit ? Or a banking crisis benefit. NO ONE.

  • 54.
  • At 12:53 AM on 28 Mar 2008,
  • zo bolchim wrote:

The Libor - Base rate (BoE)disparity, is only an indication that even the best banks are still seen to a very risky and hence the higher risk adjusted rate.
The BoE message to the banks is quite clear - no any more asset building ( i.e loans) but we will help you maintain your current balance sheet -and i suspect this could help in two ways
1) will stop additional spending(consumer and business) in the economy, and thus help rein in inflation.
2)with point 1 done....the bank has more room to change rates over the coming months.

  • 55.
  • At 09:42 AM on 28 Mar 2008,
  • Jacques Cartier wrote:

> The Bank of England’s money should not be
> used by banks to fund future incremental
> lending, but only to allow them to meet
> their pressing current financial
> commitments

Money can't be pigeon-holed in
that way - money (like water) flows here and
there, and it is impossible to say which
particular tranche of pounds came from here
or went to there etc. So there is no way to
tell if the Bank of England’s money is
actually used by banks to fund future
incremental lending, because (basically) it's
all mixed in.

At least that's how it works in our house.

  • 56.
  • At 09:49 AM on 28 Mar 2008,
  • Pierre wrote:

Funny how the vast majority of posts here are from by people who are clearly anti-banks. Why do they hate them so much?

I wouldn't mind betting that these posters are:

- non homeowners
- bitter and twisted about never getting on the housing ladder
- trying to convince themselves that over-lending by banks has priced them out of the housing market because that has fuelled house price inflation. And now they want revenge!

Instead it is due to their own inability to meet the lending criteria, or save up a deposit to help them get on the housing ladder.

All these so-called experts are declaring banks are insolvent, worth nothing, and predicting massive house price falls of +40% !

Yeah right. What about other factors such as the large housing supply/demand imbalance that remains on our tiny overpopulated island?

Sure these are tough uncertain times, but there are already signs of the US economy picking up (see economic data from earlier this week).

Sorry to burst your bubble.

(try reading posts 28 & 13 and you might not be so keen on the scenarios you are hoping for!)

  • 57.
  • At 09:58 AM on 28 Mar 2008,
  • Neil wrote:

Bankers should be paid ridiculous bonuses because they earn a ridiculous amount of money for their respect firms. It just seems a lot of people here are jealous about this fact.

It is the consumer that has caused the problems we are facing today. You are all as greedy as the banks. Us bankers are just better at being greedy than Joe public.

  • 58.
  • At 11:39 AM on 28 Mar 2008,
  • Ian Harris wrote:

An interesting report on the Nationwide and the costs of mortgages in the UK is on the attached link from the BBC news finance page.

I imagine more and more mortgage companies will have to follow them.

It looks like anyone who got a long term B of E base rate tracker mortgage deal last year may have got the bargain of the century.

  • 59.
  • At 12:03 PM on 28 Mar 2008,
  • Andrew H wrote:

Quoted from #15 "When people talk about reckless lending do they mean lending to UK mortgage holders, UK credit card holders, UK businesses? These will be the groups who ultimately suffer if banks stop lending to each other and credit continues to get more expensive."

How about all of the above? We are fast coming to the realisation that the consumer boom of the late 90s and the 2000s has been funded to a large extent by debt. How many companies are there out there whose primary product actually is debt? Yes Car Credit - anyone?

But don't get me wrong. I'm not against capitalism. But the problems we are facing are not of capitalism's creation. Capitalism is the furtherance of a society by the invention, marketing and sale of goods which fill holes in people's lives (eg. don't have time to do dishes, buy a dishwasher). What we are suffering from, however, is consumerism, whose main aim appears to be to sell peopl things they do not need paid for with money they do not have, in the name of expanding the economy. For instance, how many 28" widescreen televisions are ther for under £60 on ebay, in perfect working order? Loads. Why? Because everyone has been sold 42" LCD screens for £5-600, paid for on credit, whilst the old one works perfectly.

Furthermore, even traditional companies who actually make products are being hit by the consumerism virus. Only recently, the only bit of Ford to be making money was Ford Credit.

Is this a sensible system to be living under? However painful, the bubble has to be burst, before bursting it becomes catastrophic rather than merely painful.

  • 60.
  • At 01:30 PM on 28 Mar 2008,
  • James Whitaker wrote:

I believe the banks have all traded these CDOs knowing that they were hot potatoes. They were making loads of money in the short term and it was worth their while to risk passing them on. Afterall, it was not their money to risk. All the top people responsible for this fiasco are now retiring with their bonuses of the last few years.
The damage has been done and we the public are picking up the tab by means of lower house prices, higher inflation, weaker currency and propbaly lower wages, although the job market is yet to be effected.
The fairest way to get back to reality is to force the banks to auction off their dodgey loan assets in order to get a true valuation of them. This way the true share prices of these banks will be transparent and the volatility will end, possibly with some shareholders rightly losing alot of money.

  • 61.
  • At 01:33 PM on 28 Mar 2008,
  • James T wrote:

The Bank of England should only consider any kind of financial support to a Bank when they stop paying dividends and exorbitant salaries in order to try and actually try and shore up their own balance sheets.

The culture of rewarding failure is endemic.

  • 62.
  • At 02:37 PM on 28 Mar 2008,
  • Russ wrote:

As a thought perhaps the BoE could offer to some of the loans off the banks who are cash strapped for xpence in the pound.

They do due diligence and offer tired levels:-
very safe 90p in the £
reasonably safe 80p
slightly risky 65p
risky 40p
toxic - don't touch.

Then the banks can get some more money, and the risk to the taxpayer is lower. We may even make on the deal!

  • 63.
  • At 11:22 PM on 29 Mar 2008,
  • Adam wrote:

The fact that Libor is rising is a proper market reaction to the lending problems there have been recently. If the central banks try to "fix" the interest rate lower than the market says it should be, the result will be market distortions, with excessive lending and too little saving. That would prolong the pain, not ease it. The truth is we have been having a party on credit for the last few years and now the bills are coming in. Much like the late 1980's in fact. So much for Gordon Brown's hubristic boast that he had got away from "Tory boom and bust".

  • 64.
  • At 12:43 PM on 30 Mar 2008,
  • Chris wrote:

We're suffering now for our failure to join the euro. We should get in as soon as possible and stop this bunch of idiots tinkering with the economy any longer.

  • 65.
  • At 08:59 PM on 30 Mar 2008,
  • Tim wrote:

Those pushing for a bailout of the banks in this thread are short-sighted, and their accusation that those against bailouts are cutting off their nose to spite their face misses the point entirely, a point that Mervyn King mercifully has not forgotten: there will be further crises in the financial markets in the future, and his responsibility is for the long-term health of the economy.

This crisis was brought on by irresponsible behaviour by banks. If that behaviour leads to rich rewards when the going is good, and bailouts when the bubble bursts, then banks will take note and be just as irresponsible in the future. This will have a terribly destabilising effect on the economy, heralding the return of boom and bust, but on a grander scale. This is precisely the outcome feared by Mr King and explains his cautious approach.

  • 66.
  • At 01:37 AM on 03 Apr 2008,
  • Paul wrote:

Tony comment 48 LIBOR = London Inter Bank Offer Rate or what rate the banks are prepared to lend money to each other at.

There is also a European equivelent Euribor.

Banks cannot service the demand for credit from deposits on hand. So what they do is borrow money from other banks and then sell on at a profit.

Historically LIBOR has been within 0.25% to 0.50% above Bank of England base rate over the past 10 years.

The current crisis is caused by the fact that LIBOR is nearly 0.75% over base. This is because banks currently do not trust each other.

They have doubts that if they lend the money to another bank that they will be repaid.

This means that those lenders with money are reluctant to let other banks borrow from them.

This means that LIBOR increases as the demand for money is greater than the supply.

There are another two elements to consider.

I suspect that some banks are deliberately holding onto money to service their own customers.

I suspect that others are being plain greedy/making a business decision to add profit ?

Yes, they can get nearly 6% today , but if they wait another week will they get 6.1% or 6.2% or even more if they wait longer ?

This is why the cost of borrowing is increasing for all consumers.

I'm certain that some bankers or someone with an MA in Economics will correct the detail, but I have attempted to explain the situation in very basic terms.

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