UK Banks Meet BoE as Industry Jitters Persist

Liquidity, rumour-mongering and housing market troubles top the list of subjects for discussion when Britain's top bankers meet senior officials from the Bank of England on Thursday.

They run the risk of talking into the Easter holidays such is their full agenda, as Britain's banking industry, already facing its toughest period for over a decade, was rattled on Wednesday by speculation that a bank was facing liquidity problems.

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

HBOS slammed the rumours and authorities joined in with an unprecedented public reaction. The BoE said no bank was in trouble and the Financial Services Authority warned it will hunt out people spreading "unfounded rumours." ID:nL19116131.

The quick reaction from authorities showed investors remain jittery about UK banks, and also that authorities are more alert to worries than six months ago, when they were criticised for a slow reaction to a crisis at mortgage lender Northern Rock, since nationalised.

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 BoE can lubricate the system and restore confidence will therefore dominate much of Thursday's meeting.

Chief executives or senior directors from the "Big 5" banks -- HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS -- are expected to meet BoE officials, including 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 U.S. interest rates this week and other measures to boost liquidity by central banks have provided only temporary comfort for banks there.

Investment bank Bear Stearns last week became the latest U.S. casualty of the global financial crisis, prompting the Federal Reserve to expand lending to securities firms for the first time since the Great Depression of the 1930s.

The BoE added an extra 5 billion pounds ($10 billion) to its normal weekly lending operation on Thursday 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.

Authorities are concerned that speculators can benefit from wild gyrations in share price and spread false information and banks and the BoE 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.

Britain's housing market has cooled and there are concerns it will deteriorate further as consumer confidence erodes.

Other issues that could be addressed include the exposure of banks to risky financial assets and the impact on capital positions; the competition they face from state-owned Northern Rock; and changes to the Tripartite system of bank regulation.