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Bank of England officials meet top British bankers

Heads of major British banks prepared to meet with senior officials from the Bank of England yesterday following days of bearish pressure on bank stocks.

The central bank said the meeting was scheduled a week ago and was not in response to any specific event.

But the session came a day after the bank publicly denied rumors that lender HBOS PLC was seeking emergency funding.

Liquidity, rumor-mongering and housing market troubles topped the list of subjects for discussion. The bankers and officials run the risk of talking into the Easter holidays before they have addressed the entire agenda, as Britain's banking industry, already facing its toughest period for over a decade, was rattled on Wednesday by the speculation that HBOS was facing liquidity problems.

HBOS, the country's biggest mortgage provider, bore the brunt of the chatter and its shares crashed 17 percent.

WARNING

HBOS slammed the rumors and authorities joined in with an unprecedented public reaction. The central bank said no bank was in trouble and the Financial Services Authority warned it would hunt out people spreading "unfounded rumors."

The quick reaction from authorities showed investors remain jittery about British banks and also that authorities were more alert to worries than six months ago, when they were criticized for a slow reaction to a crisis at mortgage lender Northern Rock, which has since been nationalized.

Britain's biggest bank sector victim so far is Northern Rock, also hit by a shortage of liquidity in financial markets that remains at the heart of industry concerns as banks stop lending to each other.

How the central bank can lubricate the system and restore confidence was expected to dominate much of yesterday's meeting.

Chief executives or senior directors from the "Big 5" banks -- HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS -- were expected to meet central bank officials, including Bank of England Governor Mervyn King, for a "regular exchange of views."

The meeting was only called last week, however, and little in banking at present can be considered routine. Details of the meeting have not been released.

LIQUIDITY CONCERNS

A sharp cut in US interest rates this week and other measures to boost liquidity by central banks have provided only temporary comfort for banks there.

The Bank of England added an extra £5 billion (US$10 billion) to its normal weekly lending operation yesterday in an effort to boost UK confidence, after offering the same amount in an exceptional operation on Monday.

The interbank cost of borrowing three-month sterling hit a fresh high for the year of 5.98 percent on Wednesday, after rising for nine straight days as worries about counterparty risks have left banks wary about lending to one another.

That has helped fuel the increased speculation about banks potentially in trouble.

British authorities are concerned that speculators can benefit from wild gyrations in share price and spread false information and banks and the central bank will discuss how to quell the talk early without creating a daily feeding frenzy.

There are also broader economic issues and banks could encourage policymakers to kick-start the faltering economy with an interest rate cut next month.
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