The Bank of England has said that it can loan commercial banks $21 billion with an extended repayment period in order to help them survive the ongoing credit crunch.
The Bank usually offers banks loans for only one week, but the latest round of emergency funds will be available for a five-week period. Banks which require the funds will be expected to repay at the benchmark interest rate after money is allotted on 6 December 2007.
“Given the continuing fragility in the banking system, there is a risk that markets will tighten toward the end of the year. We stand ready to take further measures to keep the overnight rate in line with bank rate,” says Mervyn King, governor of the Bank of England, speaking to the treasury committee.
“This will reduce the uncertainty of funding across the yearend for some institutions, but we’d expect this to have a limited effect. The Bank should be doing more to avert the liquidity squeeze,” says Phillip Shaw, chief economist, Investec Securities, in an interview with Bloomberg.
The UK bank’s decision comes after the European Central Bank and the US Federal Reserve have already tried to curb market lending rates this week, as lenders become increasingly jittery given the current volatility of the financial market.