An error

HSBC denies blame for forcing Barclays into the red over loan

Barclays faced fresh embarrassment yesterday over its £314 million emergency loan from the Bank of England, when HSBC, its rival, furiously denied that an error by its bankers had forced Barclays into the red.

Meanwhile, it emerged that Britain’s biggest high street banks have more than $120 billion (£60 billion) worth of exposure to the troubled asset-backed commercial paper market.

The banks have suffered a torrid few days, in which HBOS bailed out a $35 billion in-house fund, Barclays became the first bank to call on the Bank of England’s lending facility since the credit crunch and Northern Rock faced speculation that it was about to issue a second profits warning.

Sources at Barclays had blamed its overnight borrowing from the Bank of England on HSBC, saying that the bigger bank had failed to provide a loan, as promised. Barclays would be eligible for compensation from HSBC, the sources said.

Both banks yesterday refused to comment on the spat, but a source at HSBC said: “Any suggestion that there was any kind of failure is absolute nonsense.”

It is thought that Barclays approached HSBC for the loan at 4.15pm, just five minutes before the deadline by which banks must ensure that their accounts with the Bank of England are in the black. It takes about three minutes to transmit an interbank payment, leaving HSBC with too little time to finalise the necessary paperwork to meet the deadline.

A source at Barclays described the request for a loan from HSBC as a “last-gasp attempt” to avoid borrowing from the Bank of England.

The Bank’s standing facility allows banks to borrow money at one percentage point above the base rate. The facility is frequently used to cover short-term shortfalls – loans are usually repaid the following day. However, banks are particularly sensitive about the issue because recent turmoil in credit markets has prompted speculation it may be used due to liquidity problems.

HBOS’s move on Tuesday to suppport Grampian, a type of fund known as a conduit, was seen as a further sign that tightening in the credit markets was biting the high street banks’ ability to raise funding.

Conduits invest in asset-backed securities such as retail and commercial loans. The investments are financed by issuing commercial paper, but demand for asset-backed commercial paper (ABCP) has dried up as problems with US sub-prime mortgages and falling stockmarkets sent nervous investors fleeing.

HBOS said that it would extend credit to Grampian until the fund could borrow more cheaply using ABCP. Grampian is the biggest conduit in Europe, with about $995 million invested in US sub-prime mortgages. Lloyds TSB has a $22.8 billion fund called Cancara, HSBC has $23.2 billion of assets in Solitaire Funding and Royal Bank of Scotland (RBS) has $13.85 billion with Thames Asset Global. Barclays has less than $10 billion in conduits.

Sources at Lloyds TSB, HSBC and RBS said yesterday that their conduits were continuing to borrow using ABCP. Analysts at UBS estimate that ABCP provides about 4 per cent of UK banks’ funding.

HBOS and Lloyds TSB’s conduits are larger in comparison to the banks’ market capitalisation than those at HSBC and RBS, but the analysts said that these were “still not worryingly large numbers”.

UBS said: “Whilst pockets of risk will no doubt exist in these portfolios, we remain comfortable at this stage that the current issue is primarily fear and hence liquidity rather than a broad-based credit issue.”

(Published by Times Online, August 23, 2007)


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