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Last Updated: Thursday, 23 August 2007, 12:10 GMT 13:10 UK
Emergency bank loan creates fears
Traders in Brazil
Short-term traders are waiting to see whether markets will recover
A row between Barclays and HSBC over the use of an emergency lending facility has shown how fragile market confidence has become.

On Monday, Barclays borrowed 314m from the Bank of England, fuelling fears that the bank was in trouble.

To calm the market, Barclays said its hands were tied after HSBC missed a deadline to transfer funds to their account, the Financial Times reported.

HSBC says Barclays' request was made too late for it to be honoured.

Interbank payments in the UK must be paid by 16:20BST and it is understood that Barclays made the loan request to HSBC too close to this cut-off point for HSBC to deliver the funds.

Fragile confidence

Under normal market conditions, a commercial bank tapping into the Bank of England's credit facility for a relatively small amount to balance its books at the end of a trading day would not have created much attention, say analysts.

This financing option is generally used a few times a month. As it is an emergency facility, it attracts a higher rate of interest - 1% above the base rate.

It is believed that the bank's emergency loan was not connected to the problems affecting much of the financial system.

But the spat reflects the fragile confidence in global credit markets, which have suffered as a record number of US homeowners with poor credit or on low incomes have been unable to afford to repay mortgages which they first took out when interest rates were much lower.

General panic

Banks and financial firms around the world, but particularly in Europe, have been heavily investing in this once-lucrative sector of the US housing market over the past few years through exotic financial instruments.

A number have in the past few weeks been forced to admit that these investments are now mostly worthless.

This has prompted a general panic over risky investments, such as company debt and shares, and triggered a crisis in confidence over liquidity in the financial system.

A lack of liquidity, where banks are unwilling to lend money or only do so at prohibitively expensive rates, can lead to a credit crunch that would see global economic growth slow and corporate profits shrink, analysts say.

The situation is so bad that central banks, including the US Federal Reserve and the European Central Bank, have been forced to pump billions of dollars into the financial system.


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