Banks scramble for funds at BoE weekly auction

Market participants scrambled for funds at the Bank of England's regular one-week cash auction on Thursday as banking sector nerves pushed money markets deeper into gridlock.
Banks put in bids worth 89.2 billion pounds, far exceeding the 52.8 billion pounds the central bank had to offer.
Strains in money markets have reappeared with a vengeance following the collapse of U.S. investment bank Lehman Brothers last week, with players awaiting developments from Washington on a $700 billion U.S. financial bailout plan.
Banks' desire to hoard cash rather than lend it has also been exacerbated by quarter-end accounting pressures. Traders said many banks are refusing to lend to each other for anything longer than overnight.
The Bank of England acknowledged such tensions by re-offering an additional 5 billion pounds that it first offered last week, but analysts said there was clearly appetite for more.
The spread between three-month sterling Libor and the overnight index swap rate — a key measure of money market stress — rose to a record high of more than 150 basis points on Wednesday.
"Sharp rises in Libor rates are something we are seeing not just in the UK but around the world," said Mark Capleton at RBS. "It reflects acute nervousness as the U.S. financial rescue plans make their way through Congress."
Some market participants have even preferred to leave cash overnight with the Bank of England, despite a lower deposit rate than that available in the interbank markets. Banks used the BoE's standing deposit facility last Friday for the first time in more than a year and have used it every day this week.
On Monday, more than 9 billion pounds was deposited with the central bank. This eased to around 6 billion pounds on Tuesday and just 35 million pounds on Wednesday following the central bank's decision to drain reserves from the system.
"Commercial banks' use of the Bank of England's deposit facility is another symptom of the illiquidity that's currently persisting in the banking system at the moment," said David Page, an economist at Investec. "There is presently very little lending between banks."