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British banks bailed out

• Robert Peston
• 3 Oct 08, 11:34 AM

So Mervyn has buckled, in the face of the near lethal conditions banks were facing in raising money.

There were reports from dealing floors this morning that a big British bank was having difficulty renewing credit, which took it too close-for-comfort to the brink.

And the market for commercial paper - which are securities issued by companies to provide short term funds - has been contracting in an alarming way, putting further pressure on all banks' balance sheets.

So the Bank of England has announced important steps to make it easier for banks to borrow from it.

The background is as I set out in my note yesterday afternoon (Nationalisation by Stealth).

The Bank will now provide three-month loans to banks in exchange for securities manufactured out of corporate and consumer loans, and also for certain kinds of asset-backed commercial paper.

This may sound slightly technical. But it really matters, because it makes it much easier for banks to borrow from the Bank of England, to replace the funds they are finding it almost impossible to raise from commercial sources.

And Mervyn King is not underplaying the significance of what the Bank has announced.

He says: "In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity".

And there is big money to go with King's mouth.

There'll be an auction of 拢40bn of three-month loans next Tuesday, and further weekly auctions - whose size is yet to be determined - till at least 18 November.

This represents a massive increase in the help provided to banks by the Bank of England - and, of course, it means in effect that we as taxpayers are replacing all those funds that banks can't raise from wholesale markets.

What King has done should ease some of the strains in the banking system, though it won't be business as usual for a long long time.

And the Bank of England's succour is particularly important for HBOS, which was identified by investors as having the greatest difficult raising vital finance.

HBOS can now be confident that it will be able to raise the cash it needs - which means that today's action by the Bank of England can perhaps be seen in part as a bridging loan to it, till its rescue takeover by Lloyds TSB is safely completed.

PS. On the Ten O'Clock News on Wednesday night I took the slightly eccentric step of quoting , who in the 1870's taught us more-or-less all we know about how to deal with banking panics.

Bagehot was not a fan of the way that the Bank of England had reacted to 19th century banking crises, arguing that it had responded "hesitatingly, reluctantly and with misgiving".

He also wrote: "To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now being pursued".

Some critics of the Bank of England would say that Bagehot's criticism could apply to the recent performance of the Bank of England.

However, today's statement by Mervyn King, that the Bank of England stands necessary to provide whatever liquidity is necessary to protect the integrity of the banking system, implies that he's been re-reading his Bagehot.

UPDATE 15:16 Although HBOS is perceived in the market to be particularly strapped for cash, and is therefore a significant beneficiary of the Bank's new-found largesse, it isn't the bank that was having difficulty renewing credit in the money markets this morning.

That was another of our big banks - which only goes to show that the liquidity drought (which was acute again this morning) is vicious and pervasive.

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