The Telegraph is reporting British banks gorge on ECB’s cheap credit.

British lenders are shunning the Bank of England and turning instead to the European Central Bank on a massive scale, taking advantage of much lower interest rates and guaranteed anonymity to weather the credit crunch.

EU sources say Britain’s banks have been clamouring for money in Frankfurt, accounting for a substantial chunk of the €190bn (£132bn) lent last week in the ECB’s variable tender operation. “It is fair to say they have been borrowing from the ECB on a very large scale. It’s cheap, so why not,” said one official.

Hans Redeker, currency chief at BNP Paribas, said British reliance on ECB funds has become to big that it is leaving a clear footprint in the currency markets, forcing up sterling on the days following ECB tenders as the banks switch euros into pounds – typically Thursdays, Fridays, and Mondays.

“There’s been a huge amount of borrowing. It is causing movements in the euro-sterling exchange rate that do not make any sense otherwise. It is why the pound shot up in early September when the liquidity crisis was in full swing and there was nothing to justify this,” he said.

“The money markets may look as if they are functioning again in Britain, but in reality they are not,” he said. Mr Redeker believes the key motive in going to Frankfurt is the certainty of secrecy, rather than the lower interest rate.

“Nobody wants to take up the Bank of England’s three-month tender because of the stigma. They will be punished immediately by the markets,” he said.

While the Bank of England says it will not publish names, there are concerns that the British press will unearth the story somehow. It is safer to stick to Frankfurt, where the ECB does not even reveal the nationality of banks coming to the window — masking the picture.

Don’t Ask Don’t Tell Price Stability

Flashback September 20, 2007: Price Stability & Top Secret Missions

Occasionally, like now, Central Bankers need Covert Actions to “ensure price stability”.

Bank of England Governor Mervyn King said today that British and European Union laws complicated plans to rescue Northern Rock Plc and prevented the Bank from acting covertly to prevent a panic. “The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer.”

What way does Mervyn King prefer? Covertly of course. The Bank Of England does not want anyone to know what it’s doing. (For that matter neither does the Fed). This is interesting because just a week ago Governor King said it was a moral Hazard to bail out Northern Rock. I guess there is no moral hazard as long as it can be done on a top secret mission and no one knows.

The ECB credit gorge is just the beginning of what can be accomplished by a broad policy of Don’t Ask Don’t Tell.

For example, I see that on September 28, 2007 the Bank of Canada injected $1-billion to defend rate.

The Bank of Canada injected almost $1-billion into money markets yesterday, a stark reminder that all is not right in Canada’s credit market.

Just two days after Bank of Canada Governor David Dodge declared that “the overnight market is now well on its way back to normal operations in Canada,” the bank found itself having to defend its key interest rate with one of its largest cash injections to date.

The central bank also increased the amount that it leaves in its settlement system to allow for easy money transfers between banks. It has set aside $300-million, instead of the $150-million target of the past few weeks, and the $25-million during normal market conditions.

“It drums home the point that it ain’t over,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

Credit crises are exactly the kind of things that people will talk about under clearly failed policies of ask and tell. In the interest of price stability, central bank actions and in fact all bank lending should be kept in the dark.

Don’t Ask Don’t Tell Applications

  • How much mortgage collateral is the Fed holding? DADT.
  • Coupon Passes? Repos? It’s best if you don’t know. DADT.
  • What’s the total amount of government debt? DADT.
  • How much off the book assets are held by banks? DADT.
  • Are those assets marked to market? DADT.
  • Are corporations smoothing earnings? DADT.
  • What’s that land worth? DADT. They don’t make land anymore. Land prices always recover.

For the sake of price stability we are just scratching the surface of things no one should ask about and no one should disclose if asked.

In case a few new readers missed the sarcasm, I am not serious about recommending more Don’t Ask Don’t Tell Applications. Interest rate micromanagement by the Fed in conjunction with other government distortions, all topped with increasing secrecy is a huge part of the problem set. Don’t expect central bankers to see it that way.

Mike Shedlock / Mish/