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The shame of smelly banks

• Robert Peston
• 26 Sep 07, 02:00 PM

That no bank put in a bid for the three-month loans on offer from the Bank of England was wholly predictable. As I said in my note yesterday, if someone is charging you £6 for five-pound notes, but you can have them at £5.50 in the market down the road, what are you going to do?

The Bank was charging £6, in effect. And the only takers would have been those barred from the market.

So does the total absence of anyone wanting the Bank’s readies mean that the banking crisis is over, that it’s business as usual, that there are no residual liquidity problems for any small banks?

No, no and no.

Confidence is returning to markets. The rates being charged by banks for lending to each other have been on a steady downward path for a few days.

But credit is still pricier than it should be. And there remain serious challenges for smaller banks when endeavouring to finance their lending activities. They are succeeding by their skin of their teeth – but it isn’t easy.

The Bank of England isn’t abandoning the auctions. It will hold them on Wednesdays in each of the coming three weeks.

A reasonable criticism of the Bank is that it is charging too much for this money (see Banks' Scary Auction). The funds are attractive only for banks with the financial equivalent of devastating BO and which find it hard to raise funds from other banks. But, understandably, no bank dare admit it wants the Bank of England’s cash, because that would be the equivalent of sticking up a hand and shouting, “Look at me, I smell”.

However it makes sense for the bank to offer the money again in coming weeks, just in case the BO is a symptom of a rather more worrying condition.

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