August 26, 2007 (LPAC)-- The Bank of England's efforts to declare the UK free of the financial tormoil worldwide was shattered this week. On Tuesday, news that an unnamed institution had borrowed from the Bank of England's emergency facility spooked the markets, sparking a frantic search for the lender. Today, on the front page of the Financial Times, readers are informed that on Monday, Barclays sterling cash money market desk asked HSBC for a 314 million pound interbank loan to cover a shortfall in its account with the BoE. "HSBC agreed to attempt to honor the request but warned Barclays that, as the system for interbank payments closes at 4:20 PM, the cash might not arrive in time. Interbank payments take three minutes to be processed, which means HSBC effectively had only two minutes to approve the transfer to Barclays. The payment narrowly missed the deadline and Barclays then narrowly borrowed from the BoE at a penalty rate."
Because of the "fragile state of financial markets", as the Financial Time writes, banks are loath to admit that they had to dip into the BoE distress facility for fear of setting off alarm bells about their own condition, and this little story could be designed to dispel the alarmists. None of the observers have asked the question: why did Barkley's money market desk desperatly need 314 million pounds in the first place?
The likely answer to that question was reported elsewhere today by another British daily, the Independent, which reports that the Royal Bank of Scotland (RBS), and several other leading British banks, have been in discussions with the Bank of England about seeking a "Canadian solution" to the problem of the collapse of the asset back commercial paper (ABCP) market. The latter refers to last weeks agreement in Canada among a dozen Canadian and international financial institutions, including Barclays, whereby short term ABCP, which has become unsellable, is being turned into longer term loans.
Typically, ABCP originates with banks who have bundled a variety of debt, including subprime mortgages, credit card debt, auto loans and leases, etc., into new short term securities which they sell to investors through a nominally independent company called a "conduit", thus keeping it "off their books," and often falsely rated to cover up the underlying junk, enabling them to acquire cheaper credit. In the last weeks, "conduits" such as Canada's Coventree have been unable to roll over this debt because of the freezing up of the credit markets.
While Canadian ABCP amounts to $120 billion, and the total ABCP in the U.S. and Europe is at least $1.1 trillion, no one has ventured a figure on how much is held in Great Britain - but it could very well be in the hundreds of billions. RBS refused to comment on the press reports of talks with the BoE. All the major British banks have conduits which are deep into ABCP, including HBOS, HSBC, Lloyds TSB, RBS, as well as Barclay's, all of whom refuse to comment on the talks with the BoE.
