Barclays Forced To Arrange £1.6bn BoE Emergency Loan

Barclays has emerged as the financial institution that borrowed £1.6 billion from the Bank of England’s credit facility — the second time this month that the high street bank has had to obtain emergency funding from the UK’s lender of last resort.

Barclays said that a technical glitch with the market settlement system forced it to turn to the central bank for funds. The loan comes amid renewed concerns about the willingness of banks to lend to one another. Concerns over solvency after the credit crisis have sent the cost of some borrowing between banks soaring.

The London Interbank Offered Rate (Libor), at which banks lend between each other for 90 days, climbed to 6.63 per cent. With the base rate expected to stay at 5.75 per cent over the next three months, analysts said that the huge premium for borrowing was a sign that banks were refusing to lend to one another on a massive scale, despite the clear opportunity for profits.

The loan on Wednesday night was the third-largest borrowing from the Bank of England this year, topped only by a £3.9billion loan in June and £1.9 billion in July. The Bank has granted short-term credit worth almost £10 billion this year.

Barclays is thought to have accessed the Bank’s so-called standby facility after a malfunction at CREST caused the electronic settlement system’s interface with the Bank of England to fail at 2.30pm on Wednesday. When the system restarted at 3.30pm, Barclays, one of the UK’s biggest clearing banks, saw that it had a sterling shortfall.

All banks must ensure that their Bank of England accounts are in the black by 4.20pm. Sources familiar with the matter said that Barclays tried to borrow in the wholesale market but was unable to secure the cash, in part because of other banks’ reluctance to lend at any cost. Potential lenders were also hampered by their own problems with CREST, which made it difficult for them to see whether they had surplus cash to offload.

A source said: “This was a technical glitch, not a liquidity problem. It’s a bit of serendipity, really, which bank is long and which bank is short at the time that the system goes down.”

A spokesman for Euroclear, the owner of the CREST system, said yesterday that no client had reported any settlement problems. “We were back to normal within an hour,” he said. “To ease clients’ end-of-day transaction processing, we extended our deadline by an hour.” It is not unusual for banks to use the Bank of England’s facility, but tension over the use of emergency credit has mounted in the wake of the turmoil gripping the international credit markets and the expectation that a medium-sized banking player might struggle to raise short-term finance.

This month Barclays was forced to borrow £314 million from the Bank of England after HSBC could not process a last-minute request for a loan in time for Barclays to settle its account at the Bank. Speculation that Barclays was behind the latest borrowing sent the bank’s shares down 2p to 597p each. Barclays declined to comment.

The Bank’s so-called standby facility lends at a penalty rate of 6.75 per cent. Fifty-seven institutions have access to the facility. They include European banking groups such as Credit Suisse, Deutsche Bank and UBS, Wall Street heavyweights Bank of America and Citigroup, and smaller users of the capital markets such as the Yorkshire Building Society. The Bank of England has asked banks not to talk about their use of the facility, in an attempt to calm fears that a UK bank will need emergency funding because of liquidity problems as a result of a tightening in the credit markets.

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