LENDING between United Kingdom banks slumped 68 percent in July as financial institutions hoarded cash to shore up their balance sheets, indicating Bank of England efforts to revive money markets aren't working.
The volume of interbank lending in the British currency fell to 205 billion pounds (US$369 billion) from 635 billion pounds last July, accordingto the central bank data published yesterday, Bloomberg News reported.
Banks are curtailing lending while losses from the collapse of the United States subprime-mortgage market climb above US$500 billion. Interbank lending rates are little lower now than they were in April, when the Bank of England offered to take on damaged mortgage-backed bonds in a bid to unfreeze lending.
"We're in the same position we were in last year, with banks hoarding cash to refinance their own beleaguered balance sheets," said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt.
"The Special Liquidity Scheme has helped individual banks by preventing them from becoming illiquid, but it hasn't helped money markets return to normal." The July figure, which excludes central bank transactions, is up from 195 billion pounds in June. The total peaked at 656 billion pounds in February last year.
The central bank program allows commercial banks to swap mortgage-backed securities harmed by the credit squeeze for government bonds. The lending freeze led to the collapse of mortgage lender Northern Rock Plc in September, triggering the first run on a UK bank in more than 140 years.
The credit famine and the fastest inflation in at least a decade have brought the UK to the brink of a recession. Gross domestic product stagnated in the second quarter, ending the nation's longest stretch of economic growth in more than a century, according to government data.
Bank of England Governor Mervyn King said in June he will unveil a new money-market system this year to cope with both "normal" and "stressed" conditions. He hasn't said when or whether banks will reveal their participation in the June plan.
"It's significant that lending volumes have stopped falling, but what's worrying is the level where they've stabilized," said Lena Komileva, an economist at Tullett Prebon Plc in London. "This new order reflects weak confidence in credit quality as a result of banks struggling to refinance their loan books. It's a striking illustration of a crisis at its height."
A crucial measure of the availability of interbank funds, the premiums banks charge each other for three-month cash relative to the overnight indexed swap rate, also hasn't improved much in recent months.