Leading City financiers will hold talks with the Bank of England on Wednesday as a senior banker warned that capital markets had suffered a “heart attack” this summer and faced a critical period of convalescence.
Discussions at what is normally a routine monthly consultation are expected to be dominated by growing concern over the seizing up of money markets in spite of large injections of liquidity by central banks.
The cost of borrowing money in the London interbank market was at almost a nine-year high on Tuesday.
Hans Jörg Rudloff, chairman of Barclays Capital, said the next four to six weeks would be crucial as investors tried to establish price levels for risk and banks expanded balance sheets to take on assets held by stricken investment vehicles.
“This is the big question: are we capable of establishing a new price level for these assets? If we stay stuck, the patient is going to die,” Mr Rudloff said, during a speech to Russian business executives in Moscow.
“Trading of assets has to be resumed. Transmission mechanisms have to be restored,” he said, speaking in his capacity as chairman of the International Capital Markets Association, rather than Barclays Capital chairman.
His comments come amid signs that parts of the financial system are paralysed by a growing sense of mistrust over where credit losses may lie, leading to an unwillingness among banks to lend to each other for more than a day at a time.
The London interbank – or Libor – rates are important because they are accepted as the risk-free rates for transactions around the world.
on Tuesday, the scramble pushed the three-month sterling Libor rate to 6.7975 per cent, more than 100 basis points above the Bank of England’s official base rate of 5.75 per cent, and its highest level since the financial crisis of late 1998.
The three-month US dollar-denominated Libor rate – which normally hovers slightly above the Federal Funds rate, now at 5.25 per cent – rose to nearly 5.7 per cent, up from nearly 5.67 per cent on Monday. A month ago, the rate was 5.36 per cent.
So far, the Bank of England, which holds its monetary policy meeting tomorrow, has not introduced emergency measures, in contrast to the European Central Bank and US Federal Reserve.
At Wednesday’s consultation, the Bank is likely to step up efforts to persuade private sector bankers to raise their projections for how much money they expect to require next month in regular funding operations.
Marc Ostwald, fixed-income strategist at Insinger de Beaufort, said: “The Bank is now in a very difficult position as it has not yet intervened in the market. Now it will be damned if it does intervene, and damned if it doesn’t.”