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The Bank of England’s auction of £10 billion of short-term loans to ease the liquidity crisis proved a flop yesterday when not a single bank or building society entered a bid.

The Bank came under fire last night from Richard Lambert, the CBI chief
, who said the run on Northern Rock was the kind of thing one expected to see “in a banana republic”. That it had happened “in a mature and prosperous country like the UK is almost unimaginable,” he said in a speech to business leaders in Northern Rock’s home town of Newcastle.

<snip>

Bankers said that they had shunned the auction of three-month money because cheaper finance was now available in the commercial money markets and because of the stigma. Three-month Libor, the rate at which the banks borrow from one another was 6.34 per cent yesterday, considerably less than the minimum rate of 6.75 offered by the Bank.

<snip>

Two weeks ago banks were desperate for three-month loans because of paralysis in the interbank market but at that time the Bank believed offering credit would have encouraged reckless lending in future. It changed its mind last week, announcing four auctions of three-month money, and agreed to water down its collateral rules too.

The lack of bids in Threadneedle Street yesterday contrasted with the European Central Bank, which pumped another €50 billion (£35 billion) of three-month loans into the system: 159 banks applied for €85 billion of borrowings.

<snip>

Northern Rock shares were marked 12 per cent higher to 182p as dealers reacted to Tuesday’s announcement that the bank had received several approaches. Banks including Citigroup, National Australia Bank and ING were seen as potential buyers, alongside private equity groups such as Cerberus Capital and JC Flowers.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2540146.ece
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