BoE raises reserves limits to help banks

British banks (BoE) will be allowed to hold more cash at the Bank of England with effect from Thursday, the central bank said, giving greater flexibility to address liquidity needs on any given day.

The credit crunch has made it harder for banks to get hold of funding from money markets. By having a bigger cushion at the BoE, banks will not have to rely so heavily on markets if they need to source cash quickly.

The BoE said it would raise its reserves target ceiling for banks to the higher of £2.5 billion or five per cent of sterling eligible liabilities.

Previously, the ceiling had been set as the higher of £1 billion or two percent of eligible liabilities.

"Given the uncertainty around liquidity, banks have been choosing to hold more reserves at the Bank of England," said Philip Shaw, an economist at Investec.

"A higher reserves target gives commercial banks more flexibility. They can draw down on that bigger cushion." The BoE said it was making the changes "in view of the increase in the reserves target set by reserves scheme members in recent months, and the potential for increase in future months".

"Reserves scheme members wishing to set a target for the new maintenance period in excess of their current ceiling may do so tomorrow," the BoE said.