BoE raises reserve limits to help banks

British banks will be allowed to hold more funds at the Bank of England with effect from May 8, the central bank said on Friday, giving them greater scope to meet liquidity needs on any given day.

The global credit crunch has made it harder for banks to get hold of funding from money markets, with interbank lending rates climbing well above official borrowing costs.

By having a bigger cash cushion at the central bank, commercial banks will not have to rely so heavily on markets if they need to source cash quickly.

The BoE said it would raise its reserves target ceiling for banks to $4.96 billion or five per cent of sterling eligible liabilities, whichever is higher.

The ceiling was previously 1 billion pounds or two per cent.

"Given the uncertainty around liquidity, banks have been choosing to hold more reserves at the Bank of England," said Philip Shaw, an economist at Investec.

"A higher reserves target gives commercial banks more flexibility. They can draw down on that bigger cushion."

However, banks are still required to keep within their strict reserves limits on average across the monthly periods for which they are set.

The BoE has been under pressure to do more to help ease the lending squeeze that has driven the global economy to the edge of a sharp slowdown and already forced the British government to nationalise one failed mortgage lender, Northern Rock.

Last week, the central bank announced a 50 billion pound swap plan to enable banks to exchange hard-to-shift mortgage-backed  assets with easily tradable government debt to help restore confidence and ease interbank lending conditions.

The BoE said it was making the latest changes "in view of the increase in the reserves target set by reserves scheme members in recent months, and the potential for increase in future months". "Reserves scheme members wishing to set a target for the new maintenance period in excess of their current ceiling may do so on Tuesday May 6," the BoE said. (Reuters)

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