BoE Emergency Loans

LONDON (Reuters) - The Bank of England should offer emergency loans to banks at a lower rate during times of market stress such as those seen this summer, the bank industry's leading lobby group said on Tuesday.

The British Bankers' Association (BBA) also said the Tripartite system that regulates the financial system needs to agree a clearer allocation of roles and responsibility between the Treasury, the Financial Services Authority and the Bank of England.

In written evidence to the Treasury Select Committee inquiry into the credit crunch crisis at mortgage bank Northern Rock, the BBA said financial stability should be the paramount aim of financial institutions and regulators, and transparency should be pursued as far as possible -- except "when messages might be misunderstood by an anxious public".

An investigation is needed into why the system for assessing banks' liquidity failed to alert regulators to the problems at Northern Rock, the BBA added.

Northern Rock was forced to seek emergency funds from the Bank of England on September 14, after the lender failed to secure financing in wholesale markets when banks stopped lending to each other in August following the turmoil in credit markets.

The BBA said the Treasury Committee's review should focus on the earlier stages of the regulatory process.

The Bank of England should relax its penalty rate of 1 percent above the base interest rate at times of "market stress", it said.

Barclays, Britain's third biggest bank, used the standing facility twice in August, sources close to the matter said. It is not uncommon for banks to use it, but its use has sparked concern that banks were in trouble after the market liquidity problems.