Interbank lending rates for three-month sterling continued to climb yesterday - in spite of Wednesday's emergency half-point cut in UK base rates and Chancellor Alistair Darling's pledge of hundreds of billions of pounds to kick-start wholesale funding markets.
The further rise yesterday in sterling interbank rates at all maturities across the one-month to one-year time horizon underlined the scale of the challenge facing the UK government as it tries to make banks confident about lending to each other again, and so try to contain the economic fall-out from the global credit crisis.
The British Bankers' Association's London Interbank Offered Rate for three-month sterling rose from its 6.27125% fixing on Wednesday, minutes before the Bank of England announced the emergency half-point cut in UK base rates to 4.5% as part of co-ordinated global central bank action at noon, to 6.28125% yesterday.
The fixing yesterday is more than one-and-three-quarter percentage points above base rate - a huge spread. The spread is even more yawning given economists' median expectation now that base rates will be at 4% by the year-end.
Homeowners and businesses are among those facing further misery, with grim consequences for the economy as a whole, if the interbank lending markets cannot be sorted swiftly.
London-based HSBC yesterday became the first to go public on its exact part in the government's agreement with seven big banks and Nationwide Building Society to boost capital by an aggregate £25bn.
HSBC said it had strengthened the capital base of its UK banking subsidiary through an equity injection of £750m, "representing 1% of the total shareholders' equity of the HSBC Group as at June 30". This capital injection had been funded, HSBC emphasised, from the group's own resources.
The bank made it clear that, with what is certain to be a very modest injection relative to the capital requirements of some of its fellow UK banks, it was "fulfilling its agreed commitment to the UK government's banking sector scheme".
HSBC reiterated "it has no plans to utilise the UK government's recapitalisation initiative". The government on Wednesday offered to put up as much as £50bn of capital for a group comprising Abbey National, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered.
Within hours of Wednesday morning's announcement of the recapitalisation scheme, HSBC, Standard Chartered, and Abbey had declared they had no intention of raising capital from the state.
This reinforced the City's belief that the government's £50bn offer of capital, in the form of Preference shares or permanent interest-bearing shares, is essentially aimed at Royal Bank of Scotland, Lloyds TSB, HBOS and Barclays.
Speculation continued yesterday that Barclays might try its existing investors' appetite for new Preference shares or similar instruments before going to the government for capital.
The US government is, meanwhile, moving to follow the UK in injecting equity stakes into banks. A financial policy source familiar with the thinking of US Treasury Secretary Hank Paulson told news agency Reuters yesterday that the American government planned to start injecting capital into US banks as soon as the end of this month.
Yesterday's rise in sterling interbank lending rates for durations of one month to one year was particularly disappointing given the scale of the UK government package announced on Wednesday. However, it may take time for these measures to dispel the fear in interbank markets and the scheme's success will to some degree also depend on co-ordinated global action on liquidity.
Darling said on Wednesday that the Treasury would "on appropriate commercial terms", provide to eligible banks a "Government guarantee of new short and medium-term debt issuance to assist in refinancing maturing, wholesale funding obligations as they fall due". It added that it expected the take-up of this guarantee to be "of the order of £250bn".
He also unveiled an increase in the size of the Bank of England's Special Liquidity Scheme, which allows banks to swap difficult-to-trade assets such as mortgage-backed securities for gilts, to "at least £200bn". The scale of this scheme was not disclosed when it was introduced in the spring, but it has to date been estimated at about £100bn.
Darling also announced plans to introduce a "discount window" facility for banks, in a move which seems aimed at destigmatising unplanned approaches for funds to the Bank of England. Use of the Bank's current standing facility has tended to carry a stigma.
BBA Libor for overnight sterling eased yesterday to 5.41875%, from 5.83125% on Wednesday. However, the 0.4125 percentage-point fall was less than the half-point cut in base rates. This meant that the gap between overnight sterling LiborR and base rates actually widened, to 0.91875 percentage points.
Shares in Bank of Scotland and Halifax parent HBOS, in spite of the continued dislocation of the wholesale money markets on which it relies for much of its funding, rose 36.5p or 31% to 153.5p yesterday. The discount at which HBOS shares are trading to the level of Lloyds TSB's agreed offer for it, regarded by the City as a rescue takeover, narrowed from 33% on Wednesday to 13% yesterday.
Lloyds TSB is offering 0.833 of its shares for every one in HBOS.
Standard Life Investments yesterday announced it had hiked its stake in HBOS from 3.19% on Monday to 3.48% on Wednesday. SLI, a consistent buyer of HBOS shares in recent weeks, on Wednesday purchased a further 15.6 million shares at prices between 113.6415p and 146.4665p.
Royal Bank of Scotland shares rose 5.3p to 96p yesterday, having touched an intra-day high of 114.6p but failing to hold the 100p mark later in the session.
Shares in Lloyds TSB rose 1.75p to 211.75p.
HSBC also highlighted its efforts to support interbank lending markets yesterday.
It said: "HSBC also continues to support efforts to stabilise the operation of financial markets and over the last three days has provided significant amounts of liquidity to the London sterling interbank market, lending around £4bn of three-month and six-month money to other banks. HSBC will continue to support the London interbank market."
Attempting to underline its capital strength, HSBC said yesterday: "With a tier one capital ratio of 8.8% and a loan-to-deposit ratio of 90% as at June 30 2008, the group remains one of the most strongly-capitalised and liquid banks in the world.
The Republic of Ireland government agreed yesterday to include significant Irish operations which are owned by foreign banks, including those of HBOS and Royal Bank's Ulster Bank and First Active, in its proposed blanket guarantee of personal deposits. This guarantee has still to be approved by the European Union but the inclusion of some foreign-owned banking operations in the scheme could ease the approval process for a scheme which would now cover nearly 500bn of deposits.
