News has emerged that in early september Lloyds TSB applied for a loan from the Bank of England for a trifling £30 billion - it wanted to propose a deal to help rescue Northern Rock, the troubled mortgage bank. The Bank of England acts as a last resort lender for financial institutions such as banks and building societies.
Apparently, the loan was applied for 1 week before worried customers withdrew heaps of cash. Could the catastrophe have been avoided? Northern Rock’s management team certainly feel let down by the Bank of England as a result.
However there was a fatal flaw in their pitch, they asked the Bank of England for the loan to have no penalty rate interest to pay.
Interest rates for loans from the Bank of England to financial companies stands at 6.75%, that’s 1% higher than the current base rate. Penalty fees are charged for emergency borrowing but The Bank does not release what amount this is.
The Bank of England obviously refused, stating that they felt it was inappropriate to help one bank out against another. The name of Lloyds TSB was not revealed by the Bank of England and Lloyds TSB have not commented on the news, so I am not sure who leaked this morsel of information.
Check out the full report here
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