Monday, 6 October 2008

Commercial banks stash their cash at the Bank of England

Here is the first of what I hope to be a series of posts on these central bank liquidity operations. For the last forteen months, central banks have tried to revive the interbank market. So far, every measure has failed, with interbank spreads now at an all time high. For all practical purposes, banks have stopped lending to each other.

Where are commercial banks keeping their money? If they are not lending their spare cash to each other, then where are they parking the money? According to the latest Bank of England balance sheet, a fair chunk of it is sitting in Threadneedle street. Reserve balances at the bank are at an all time high.


Anonymous said...

This is what I was getting at a few days ago about why central banks are counterproductive and the bailout will make things worse.

What little cash used to be going into money market funds to supply businesses with working capital is being sucked out into money market funds that buy government debt. BoE and Fed don't lend it on to businesses = credit crunch has WORSE effect on real economy than if they hadn't gotten involved.

Same goes for this reserves at BoE. The BoE can't force those reserves into the real economy. Imagine the carnage if them fools in congress allow the Fed to pay interest on the reserves. It'll make the current situation seem like the heady days of early 2007.

I look forward to your monitoring of the situation.


Mark Wadsworth said...

This is good stuff!

How do these figures compare with BoE lending back to banks? We keep hearing about the "£40 billion temporary liquidity injections", but isn't the BoE just a middleman in all this?