The Bank of England has announced it is to provide £10billion in emergency funds to the UK's commercial banks in an attempt to prevent any further financial turmoil over the Christmas period as a result of the global credit crunch.
"To assure banks of liquidity over the year end, the Bank will be offering a substantial proportion of the reserves we supply in the form of a five-week facility that will extend to the end of the maintenance period in the second week of January," BoE Governor Mervyn King told the Treasury Committee yesterday.
The credit crisis, which has mainly come about as a result of the sub prime disaster in the US, has sent ripples through the global financial markets and, in the UK, Northern Rock was hit hardest of all due to the way it sells its mortgages.
The Newcastle-based bank bundles loans and then borrows from other banks, making a profit on the difference between its own borrowing rates and the one it charges its customers.
But the sub prime debacle, which saw thousands of US home buyers default on their bad credit loans, had a huge knock-on effect on Northern Rock's finances, and on those of any other lenders tied up in investments funded by sub prime.
Northern Rock, which is due to be saved in a takeover by Sir Richard Branson's Virgin Group, has already borrowed billions of tax payers money - reports estimated the figure to be as high as £30billion last night - and the Bank of England has been widely criticised for the extent of the loan.
On Wednesday it looked as though Alliance and Leicester, whose mortgages are organised in the same way as Northern Rock's, were also going to be forced to borrow from the Bank of England, but today it emerged that the bank had secured a £4billion cash boost from Swiss bank Credit Suisse.
Nevertheless, BoE governor Mervyn King is still concerned that the situation is going to escalate over the coming weeks and has decided to make more money available to the UK's struggling banks, saying that the "fragility of the banking system" means that further action needs to be taken.
It is hoped that the loan – set at the bank rate of 5.75 per cent – will help ease the high cost of lending between the banks, and will close the widening gap between the Libor and the bank rate.
"We stand ready to take further measures in order to keep the overnight rate in line with the bank rate," said King.
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