Rescue your conduit

Author: | Published: 1 Oct 2007

The credit crunch that has paralysed money markets represents a new kind of crisis for the wholesale banking sector. Yet in some ways it is also as familiar as banking itself. Retail banks have periodically suffered liquidity crises as depositors rush to withdraw funds, unnerved by both fact and fiction. The collapse of Johnson Matthey in 1984 and BCCI in 1991 showed elements of a classic bank run where the institution concerned was starved of liquidity. The dramatic scenes outside branches of Northern Rock on and following Friday 14 September in the UK were only the most recent example.

The extreme reluctance of institutions to lend to each other on anything much longer than a daily basis, and then only at a rate far in excess of that set by the Bank of England reflects nervousness in the market never previously experienced by the majority of those working in the...