Taking the initiative
The FT reports today that the Bank of England (BoE) has moved to improve liquidity in the banking system as talks continue to stall in the US over the $700 billion bailout of the US financial sector.
The BoE will offer an extra $30bn of borrowing for a week in an exceptional move designed to "address funding pressures over quarter-end," it said. This comes in addition to $10 billion available for overnight borrowing.
Bankers have welcomed the move, which is part of a coordinated effort with the US Federal reserve, the European Central Bank and the Swiss National Bank.
The need for this intervention and for the massive bailout proposed by the US is a lack of cash flowing around the financial system. This is due to a reluctance of banks to lend to each other until it becomes clear to what extent they're all affected by the sub-prime mortgage crisis. Apparently interbank lending for longer than a day has come to a near standstill
A further illustration of the instability within the financial sector, as if one were needed, came today with the news that Washington Mutual has been shut down by its regulator and its assets sold on to JP Morgan Chase for $1.9 billion. Apparently $16.7 billion of deposits have been withdrawn from it in the last week and a half and it has run out of cash. This is the biggest US bank to fail so far.
In a separate story, the FT reports that the rest of corporate America has shown a bit more prescience than the banks and is sitting on $648bn in cash and short-term securities, ironically roughly the amount the Fed thinks is needed to bailout the banks.
