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Mervyn moves (a bit)

• Robert Peston
• 20 Mar 08, 08:22 PM

The chief executives of Britain's biggest banks emerged from a meeting this afternoon with the Governor of the Bank of England optimistic that it will radically reform the way it provides them with emergency financial help.

Although the Governor of the Bank, Mervyn King, asked them not to divulge what they discussed, I have learned he signalled - for the first time - that he was sympathetic to their request that in an emergency they should be able to swap a wider range of assets, including their mortgages, for loans from the Bank of England.

The chief executives of the UK banks believe that they would be much less vulnerable to damaging speculation about their financial health if the Bank of England announced it was prepared to make good any hole in their finances stemming from the current crisis in banking markets.

It is understood that the Bank is examining whether it can provide support similar to the what the US Federal Reserve provides to banks through its so-called discount window.

The Fed's recently reformed discount arrangements allow US banks and security houses to exchange their mortgages for emergency funds.

Bankers believe it will take the Bank of England a few weeks to finalise the details of new support arrangements.

Until very recently, Mervyn King was reluctant to provide the kind of financial support demanded by banks, for fear he would be seen to be bailing them out for their own foolish lending and borrowing practices.

But it is understood he was alarmed by Wednesday's raid on HBOS shares, when its shares fell 20 per cent at one stage because of malicious and erroneous rumours that the leading mortgage bank was in financial difficulties.

Bankers believe that if there were an emergeny facility at the Bank of England that HBOS or any bank could tap in the event they suffer short-term funding difficulties, their share prices would be much less vulnerable to the impact of damaging lies propagated by speculators.

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Confidence and banks

• Robert Peston
• 20 Mar 08, 08:06 AM

Bit of a shock from this morning 鈥� not the stuff about how much it has lost on collateralised debt obligations as a result of alleged 鈥渋ntentional misconduct鈥� by a few traders (which seems to be a bit less than it originally estimated), but its disclosure that it is likely to be .

It says that it was profitable until the end of February but that 鈥渋n light of the difficult market conditions in March, at this time, Credit Suisse believes it is unlikely to be profitable in the first quarter.鈥�

That鈥檒l put a dent in the hopes of those who felt that just maybe 鈥� after all the evasive action by the Federal Reserve of the past few days 鈥� we could perhaps have seen the worst of the bad news from banks and the financial sector.

Which brings me round to the importance of between the chief executives of the UK鈥檚 biggest banks and the Governor of the Bank of England, Mervyn King.

It was originally arranged last week, to discuss primarily what they thought of the government鈥檚 proposals to reform the regulation of banks and the protection of depositors.

But the agenda has been widened, to include a discussion of the banks鈥� concerns that the Bank of England is not providing enough loans to them, and loans of long enough duration, to make good the current deficiencies in money markets.

The big and simple point is that the solvency of all banks depends on the confidence of their creditors.

For the avoidance of doubt, that means the confidence of most of us, as depositors in banks.

So at a time of high anxiety in financial markets, all banks are - in a sense - on the brink of insolvency.

If creditors believe - rightly or wrongly - that a bank is in trouble, well then out come the deposits, and the fear becomes self-fulfilling.

Which is why the authorities were so alarmed yesterday at the scaremongering that led to a sharp fall in HBOS's share price.

And it's also why the bosses of Lloyds TSB, HBOS, HSBC, Barclays and Royal Bank will today tell the Governor of the Bank of England, Mervyn King, that he needs to do more to reassure banks' creditors that in the event that any bank suffered a shortage of liquid funds, the Bank of England would provide whatever finance is needed.

As one bank chief executive told me, the Bank of England could eliminate all anxiety about the health of British banks by announcing that it is prepared to provide whatever loans are required by our banks until the money markets are functioning in an orderly and calm way once again.

It would require quite a change of heart by the Governor to give such an assurance. He's been concerned that the Bank of England would in a sense be giving banks impunity to behave impulsively and imprudently.

But I would expect the Bank, as a constructive gesture, to announce later today that it's rolling over the additional 拢5bn of emergency loans which it provided earlier this week and initially had to be repaid within three days.

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