Poor Mervyn King
Central banks across the world have pumped billions of dollars into money markets to limit the damage inflicted by the subprime mortgage woes. To date more than USD 300 billion has poured in from central banks in Asia, Europe and the US. By contrast Mervyn King, Bank of England Governor, has sat back, relaxed and watched the markets panic. How come?
A year or so ago the BoE set a threshold at which it may intervene in a credit crisis. In a nutshell, unlimited funds are available to those banks prepared to pay one percent (100 bp) above a target rate set by the BoE. The current target rate is 5.75%. Since the start of the current market turmoil, overnight interbank rates in the UK have peaked around 6.5% or 75 bp above the target rate. The banks have not gone bowl in hand to the BoE. For good reason.
The more illiquid the markets get, the higher the rates bank charge each other. However as soon as the rates breach 6.75%, limitless funds are immediately available to the big banks. In other words, bank lending is tight until rates hit 100 bp above the BoE target rate. This clever device limits the cost and extent of a credit crunch while confirming the BoE as the lender of last resort. And for poor Mervyn who has missed out on the fun, this is just another day at the office.
A year or so ago the BoE set a threshold at which it may intervene in a credit crisis. In a nutshell, unlimited funds are available to those banks prepared to pay one percent (100 bp) above a target rate set by the BoE. The current target rate is 5.75%. Since the start of the current market turmoil, overnight interbank rates in the UK have peaked around 6.5% or 75 bp above the target rate. The banks have not gone bowl in hand to the BoE. For good reason.
The more illiquid the markets get, the higher the rates bank charge each other. However as soon as the rates breach 6.75%, limitless funds are immediately available to the big banks. In other words, bank lending is tight until rates hit 100 bp above the BoE target rate. This clever device limits the cost and extent of a credit crunch while confirming the BoE as the lender of last resort. And for poor Mervyn who has missed out on the fun, this is just another day at the office.
Comments