Global cash injection now hits $600bn

In a dramatic move, the European Central Bank flooded continental money markets yesterday with a massive cash injection equivalent to 250 billion. This takes the total that central banks – including the US Fed and the Bank of England – have injected over the past week to about $600bn (298bn).

Borrowers in London bid for the Bank of England's three-month cash at auction. Demand was less than many analysts had expected, but most banks had to pay above base rate for the loans.

Total bids exceeded the 10bn on offer by 850 million, with the highest accepted rate being 6.6 per cent – giving a weighted average rate of 5.949 per cent.

The three-month sterling London inter-bank offered rate (LIBOR) – at which banks lend to one another – dropped for a fourth session after the auction, signalling that the central banks' rescue plan may be having an impact.

The LIBOR dipped to 6.386 per cent, compared with 6.627 per cent last Wednesday, when the central banks unveiled their rescue plan.

Said John Wraith, head of UK interest rate strategy at Royal Bank of Scotland: "The rate was low and demand was relatively low which suggests that pressures might not be as intense as we perhaps might have thought."

Across at the Commons Treasury select committee, King told MPs that there was more bad news to come for the financial sector. "A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets," he warned.

"The problems in the financial sector remain with us. In the last four weeks, banks themselves have been worried that the impact of their reluctance to lend will lead to a sharper slowdown in the United States.

"That concern is a serious one because it does hold out the prospect that there will be a self-reinforcing downturn in credit and activity.

"The nature of the problem in the last four to five weeks has changed quite markedly and when that changes then we too will change."

Yesterday's move by the ECB to pump a record 348.6bn – equivalent to more than half a trillion dollars – into money markets was designed to keep banks from Finland to France flush with the cash they need to operate.

The moves by central banks are aimed at keeping jittery markets calm amid a credit squeeze caused by the US subprime crisis.

Commercial banks have been afraid to loan each other money for short-term needs amid the credit squeeze, driving up short-term rates. The central banks are sharply stepping up their normal role as providers of liquidity, a job that usually gets far less attention than their interest rate moves.

Brian Dolan, director of research at Gain Capital, said the massive ECB liquidity injection "resonated with the markets because of its size. It satisfied a lot of the funding needs we will have over the rest of the year".

King told MPs his main criticism of the tripartite system of governance involving the Bank, the Financial Services Authority and the government was that no-one had power to intervene early enough to deal with a failing bank.

He said legislation was needed to create a special resolution regime to deal with crises such as Northern Rock. Such a new regime should be supported by credible deposit insurance.

NATIONALISATION – The government could take over the running of the bank and assume responsibility for all its assets.

PRIVATE SALE – Regarded by Northern Rock and others as the preferred option. A consortium led by Virgin wants to take a majority stake, install new management and keep the company listed.

ADMINISTRATION – This would leave nothing for shareholders and could cause more political fallout, with thousands of lost jobs.

BREAK-UP – The bank could be broken into various assets which could each then be sold to the highest bidder.