British banks shun £10bn cash auction

British banks shunned the Bank of England’s auction of three-month money on Wednesday, submitting no bids to borrow the £10bn on offer.

The dearth of demand for three-month cash – a market that has been strained of late – was the result of “a significant fall in three-month interbank rates which made the auction look expensive”, a Bank spokesman said.

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An alternative possibility was that the banks that needed the money because no one would lend to them in the market thought it too risky to use the facility for fear that any publicity surrounding their borrowing would suggest they were in trouble.

Under the auction, banks were able to offer much lower quality collateral than normal for Bank of England cash, something that represented a U-turn for the central bank. It said it would continue with its plans for further auctions of three-month money at at least 1 percentage point above its official rate of 5.75 per cent to ensure a “safety valve” remained in the system.

A spokesman said: “The auction was designed as a safety valve in the light of concerns that arose about potential pressures in the banking system more generally as a result of Northern Rock”.