Banks spurn loan facility

No bank took up the offer of a three-month loan at a minimum penalty interest rate of 6.75% - 1% above the base rate and about 0.5% higher than the current interbank lending rate.

The three-month London Interbank Offered Rate (Libor) fell to 6.26%, down from 6.28% and a sharp decline from the nine-year high of 6.9% seen last month.

The Bank of England introduced the loan offer in September to help ease the credit crunch in longer term money markets. It was the first auction of its kind in the Bank's history.

The move came in the midst of the crisis for Northern Rock, which was hit by the soaring cost of borrowing on the wider money markets, on which it is reliant to fund its mortgage loans.

Northern Rock was forced to turn to the Bank for emergency funding last month, causing a run on the bank as savers feared for the safety of their deposits.

The mortgage bank has since seen its share price plunge, but on Tuesday shares were up as it found itself at the centre of renewed takeover speculation. Reports said hedge funds JC Flowers and US firm Cerberus were due to meet the bank this week. Northern Rock declined to comment.

Analysts said potential takers for the Bank's £10 billion loan would have been put off by the high interest rates.

Investec Securities analyst David Page said today's result implied that either UK banks did not have liquidity problems "worth coughing up the penal rate for", or that they did not want to take part due to the penal rate and the stigma attached.

He said that while the Bank has pledged not to disclose the identity of borrowers, it cannot guarantee their anonymity, as was the case when Barclays borrowed £1.6 billion at the end of August and became subject to a "witch hunt by the media".