Monday, 22 October 2007

Subprime crisis continues - Barclays and RBS need funds

If you thought that the Bank of England's misguided rescue of Northern rock marked the end of the subprime crisis for the UK banking sector, think again. Today, the Telegraph carried a story suggesting that Barclays and RBS have negotiated a £15 billion line of credit from the US Federal Reserve. Ironically, this credit line is about the same size as the amount of cash that the Bank of England have poured into the forlorn and failing Northern Rock.

There is a horrible sense of deja vu with this story. Will Barclays and RBS follow the same rocky road downwards that Northern Rock recently explored?

Barclays and RBS line up Fed for Barclays and RBS line up Fed for £15bn

Barclays and Royal Bank of Scotland have lined up emergency funds of up to $30bn (£15bn) from the US Federal Reserve to bail out American clients caught up in the global credit crunch. The Fed's board of governors wrote to both banks 10 days ago, granting them access to funds for customers "in need of short-term liquidity".

The letter to RBS made particular reference to investors holding mortgage-backed securities – which have been at the centre of the sub-prime crisis. The request from the two banks is a stark reminder that the global liquidity freeze is far from over. It is similar to those offered to Citigroup, Bank of America, JPMorgan Chase and Deutsche Bank at the height of the credit crunch.

It is understood that neither Barclays nor RBS has had cause to use the Fed funding line yet. The credit line has been set up as a contingency, and may not need to be used at all, banking sources stressed last night.

Barclays has been given permission to borrow up to $20bn through the facility, while RBS can borrow up to $10bn. The banks would have to put up assets as collateral with the Fed to gain access to the cash. A spokesman for Barclays Capital said: "This secures another potential source of funding should our US clients seek it."

1 comment:

Anonymous said...

You have to marvel at the breeziness of reports like this, as if it is nothing out of the ordinary. The article does mention that the Fed expects collateral, but one has to ask: is this largely the same collateral that these banks were unable to find takers for in the commercial market? And is it reasonable to expect that this situation will materially change for the better in the future? Trying to put these assets on life support like this when they really ought to be declared dead seems absurd.