UK banks scramble to secure cash after credit crunch

Banks are still struggling to secure cash after last summer’s credit crunch despite a drop-off in the rate at which they lend to each other, an industry body revealed today.

The main London interbank lending rate – known as three-month Libor – has dropped back to 5.62% from the 6.9% high seen as the credit squeeze took hold last September.

However, industry experts today cautioned that banks are continuing to find credit conditions tough amid a global aversion to risk sparked off by the meltdown in money markets and the collapse of America’s sub-prime mortgage market.

The comments come as reports warn of a new phase of the credit squeeze, with gloomy weekend meetings of the Group of Seven finance ministers adding to the sector’s woes.

The G7 leaders forecast that credit crunch related losses could reach $400bn US (€276bn) – far greater than original US Federal Reserve estimations for losses of about $100 (€69) to $150bn US (€103.4bn).

The British Bankers’ Association said banks are also being hit by lower volumes of credit being made available and as a result of a global re-pricing of risk.

John Ewan, BBA director, said: “There’s liquidity available to everybody. The question is, is it available on the same terms and in the same volumes as it was before the credit squeeze?”

“What market participants are finding is that there is certainly movement in credit markets, but the lending does depend on the quality of your name,” he added.

Hefty write-downs announced by many of the world’s biggest banks has led to concerns over the health of the sector.

The bank reporting season over the next two weeks will be crucial for the industry, when the first set of audited accounts since the crisis began will be revealed.

Bradford & Bingley kicks off the round of annual results from UK banks on Wednesday, followed next week by Barclays, Alliance & Leicester and Lloyds TSB.

Banks are expected to reveal substantial increases in provisions for bad debt and losses from the credit crunch, with the crunch having hit in the fourth quarter of last year.

The losses are expected to continue mounting, with a report today in The Wall Street Journal also warning that a new crisis is developing in the low-rated corporate bond market, which threatens to spark further woes.

The central banks, including the Bank of England, acted at the end of last year to help avert a New Year freeze in credit markets as banks hoarded cash to balance their books at the year-end.

The measures are thought to have been helpful in seeing the interbank lending rates fall back closer to pre-crunch levels, about 20 to 25 basis points above Bank base rate.

The Bank of England’s decision to cut rates twice since the beginning of the year – to 5.25% last week – has also seen Libor come down since the height of the crunch.