Bank offers £40bn funds to ease the pain

The Bank of England waded back into the money markets today, offering banks £40 billion of longer-term funds to try to ease the lending crisis.

Banks have all but stopped lending to each other because of their fears about each other's solvency. The stalemate over US Treasury Secretary Hank Paulson's $700 billion bailout has worsened an already appalling situation for banks attempting to borrow.

As funding levels have dried up, the interest rates the banks are charging each other have skyrocketed in a trend that will eventually lead to more expensive mortgages and other loans.

The Bank pumped the extra £40 billion into the market for repayment on 15 January, and said it would accept a wider range of assets, including mortgage securities, as collateral. A second auction will be held on 7 October, maturing on 22 January.

The Bank has recently been lending on a short-term basis, but this has proved inadequate for banks attempting to rebuild their lending volumes. Investec economist Philip Shaw said: “This is a huge step forward and reflects the fact that credit markets have almost totally seized up over the last week and a half.”

An HSBC spokesman said: “It is what the market was looking for. It shows the Bank of England is willing to listen.”

But others said the move did not address the fundamental issue — banks' reluctance to lend to each other. Only a successful outcome to the bailout negotiations in Washington could solve that, they added. While the cost of borrowing in dollars for three months today stayed near its highest since January, the London interbank offered rate, Libor, fell half a basis point to 3.76% after the Bank's action.

The Bank of England's announcement came as central banks again launched co-ordinated actions to offer dollars on a one-week basis to help break the lending deadlock. The European Central Bank, the Swiss National Bank and the Bank of England pumped in $74 billion of money maturing in one week. That followed intervention by Japan, Australia and South Korea.

Analysts said the logjam in the money markets was particularly intense as the calendar quarter came to a close. Share prices gyrated tonight as the stress grew,. The FTSE 100 index fell 96.95 to 5100.07 and the Dow 60.8 at 10,961.3.