The U.K.'s top banks are mulling borrowing funds from the Bank of England's 10 billion pounds ($20 billion) facility to remove the stigma attached to it and restore confidence in the banking system, the Financial Times reported Friday.
After having insisted it would not bail out speculators, the Bank of England Wednesday offered to lend up to $20 billion against a wider range of collateral to ease the credit markets crunch.
But senior bankers are worried that the penalty interest rate attached to it means the facility will be used only by those lenders which cannot obtain financing elsewhere, and those who do use it will come under close scrutiny from the markets.
"If the big banks don't use it then it's going to be seen as a sign of weakness for everybody else," a senior executive at a large British bank told the FT. "There is a risk that they would then be seen as the next Northern Rock."
Barclays, HSBC and Royal Bank of Scotland are informally discussing a collective move where the banking giants would all borrow an agreed amount from the emergency facility in an attempt to encourage smaller financial firms that may be holding back, the paper said.
"I think it would be very helpful if the large banks accessed the facility to reduce the stigma of using the line," Carine Cunningham, head of financial analysis at Royal Bank of Scotland, told CNBC.com.
"If none of the banks use it initially, then there will be the same old witch hunt when a bank does need to draw down, thereby defeating the objective of the facility," Cunningham added.
The agreement would mirror a similar strategy in the U.S., where Bank of America, Wachovia, JP Morgan and Citigroup each borrowed $500 million from the Federal Reserve's discount window to ease concerns over the facility.