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Last Updated: Friday, 31 August 2007, 10:44 GMT 11:44 UK
Barclays needs central bank loan
Barclays bank sign

Barclays says that a "technical breakdown" in the UK's clearing system forced it to borrow 1.6bn from the Bank of England.

It is the second time this month that the bank has tapped into the central bank's emergency credit line, sparking fears it is facing a cash crisis.

But the UK bank insisted it was "flush with liquidity".

At the end of every day, banks such as Barclays have to settle their trades through the market settlement system.

Typically, if borrowings are greater than their reserves at the end of the trading session, banks can borrow money from other banks to make up the difference.

Barclays explained that it was forced to tap into the Bank of England's emergency credit line because a technical glitch meant it discovered the shortfall in its finances too late in the day to borrow from another high street bank.

It added that the malfunction affected an electronic trading system on Wednesday afternoon.

The Bank of England has confirmed to the BBC that 1.6bn was borrowed overnight from its standing facilities on Wednesday and repaid the next day, but it will not confirm the identity of bank concerned.

'Challenging times'

"Had there not been a technical breakdown, this situation would not have occurred," Barclays said in a statement.

"In these challenging times the dramatisation of such situations is of no help to markets, their members or their customers."

Barclays has been under increased scrutiny since Edward Cahill, the man in charge of structuring debt investments at the bank's investment arm Barclays Capital, unexpectedly resigned earlier this month.

His sudden departure sparked panic that Barclays could be sitting on hefty losses as a result of the devaluation of these debt funds which are heavily tied to sub-prime US mortgages - well-known to be the key factor causing havoc in financial markets.

Others in that division are also believed to have left.

Yet, Barclays' shares closed 2.6% up at 613.5p, in a sign that the market is cautiously confident that its financial position is still strong.

Greater scrutiny

The Bank of England's overnight loan rate to commercial banks is 6.75%, which is 1% above its base rate.

High street banks have gone to the Bank of England for such funding 14 times so far this year and such a loan does not usually raise eyebrows.

But such transactions have come under greater scrutiny amid concerns about a lack of liquidity in some financial institutions.

On 20 August, Barclays was forced to take out a 314m loan from the Bank of England after HSBC was unable to process a last-minute request for the money.

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