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LIBOR ouch!

  • Robert Peston
  • 26 Mar 08, 01:30 PM

Three-month sterling , 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鈥檛 changed in months: it鈥檚 that the banks remain unable 鈥 as 鈥 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鈥檚 true for those with mortgages. It鈥檚 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 大象传媒 blog last week, that the 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鈥檚 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.

FSA fesses up on Rock

  • Robert Peston
  • 26 Mar 08, 08:57 AM

The is a catalogue of mistakes, a tragedy of errors rather than a comedy.

The City watchdog admits to inadequate record keeping. Proper notes weren't taken of important meetings with Rock executives.

Northern Rock branchThere was no rigorous assessment of the serious business risks being run by the Rock, both in the way that the bank was rapidly increasing its mortgage lending and in its financial dependence on selling these mortgages to investors in the form of bonds.

In some ways, it was the riskiest bank in the UK.

But here's what will shock many.

It was treated by the as though it was the least risky bank in the UK: it received deep assessments of its operations less frequently than most other banks; FSA staff had far fewer meetings with Rock executives than they did with executives at other banks; and unlike what happened at other banks, there was no attempt to force the Rock to reduce the risks it was running.

As the FSA itself says, this was not just a failure of more junior staff. Responsibility for these failings ultimately rests with senior FSA management.

Little wonder then that the FSA has committed itself to improve the quality of its staff and to serious reform of the way it supervises all those banks whose failure could damage all of us.

UPDATE: Here鈥檚 the most scintillating part of the FSA鈥檚 review, for those of us obsessed with the ideological differences between that watchdog and the Bank of England over what kind of loans should be made by the Bank of England to a dysfunctional banking system. The killer passage reads:

鈥淥ur understanding is that, during the review period, the FSA鈥檚 approach to liquidity reflected a presumption that, in the event of a crisis like that experienced in August 2007 (when money markets seized up), general market liquidity provided by the Bank of England would be increased and, in extremis, liquidity would be provided for systemically important institutions鈥.

Which is formal confirmation that the FSA was urging the Bank of England to pump money into the markets over the summer 鈥 but the Bank refused, fearing that it would be in effect bailing out the banks for their past recklessness.

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