Base Rates and Fed/ECB Auctions

CFA Level I
#1

Hello all, I have a question with regards to Bank interest rates, the following… The Bank of England normally has an overnight lending facility available to commercial banks for them to draw on, but it charges a rate above the base rate. 1)Why would the banks not just borrow at the base rate? The Bank of England has held an auction offering to lend £10bn to the UK’s banks to ease their credit problems. At a minimum lending rate of 6.75%, whilst the base rate is 5% 2)Again if the Base rate is less than the auction offering, why would banks buy these actions when they can lend from the central bank (Fed) directly at a lower rate?

#2

Banks can borrow money from the Central Bank at discount rate when nobody else will loan money to them. http://en.wikipedia.org/wiki/Discount_window http://en.wikipedia.org/wiki/Lender_of_last_resort

#3

Thanks Maratikus, that clears it up.

#4

Question: Taken from Wikipedia: Open market operations are conducted simply by electronically increasing or decreasing (‘crediting’ or ‘debiting’) the amount of money that a bank has, e.g., in its reserve account at the central bank, in exchange for a bank selling or buying a financial instrument. What happend if the banks decline to buy or sell their financial instruments? Or do they not have that option?

#5

Reineir Wrote: ------------------------------------------------------- > Question: > > Taken from Wikipedia: > > Open market operations are conducted simply by > electronically increasing or decreasing > (‘crediting’ or ‘debiting’) the amount of money > that a bank has, e.g., in its reserve account at > the central bank, in exchange for a bank selling > or buying a financial instrument. > > What happend if the banks decline to buy or sell > their financial instruments? Or do they not have > that option? My interpretation is that if a bank chooses to buy a Treasury bond, there is no cash transaction but rather a transaction is performed on the books by adjusting the bank’s reserve amount. I’m not an expert on this matter though …

#6

Sorry one other question…If understand correctly the only really purpose for the Discount rate is if Banks cannot aquire the loans needed through Inter bank lendings? Would that be correct?

#7

Reineir Wrote: ------------------------------------------------------- > Sorry one other question…If understand > correctly the only really purpose for the Discount > rate is if Banks cannot aquire the loans needed > through Inter bank lendings? Would that be > correct? That is my understanding.