Gordon Brown called on the City yesterday to publish more information about the risky financial instruments that lie behind the credit crunch.

As a second British bank revealed its exposure to the US sub-prime crisis, the Prime Minister said that he would support international calls for greater transparency.

His remarks came as the German Finance Minister said that he believed the turmoil in interbank lending would force Britain to toughen its approach to hedge funds.

Peer Steinbrück, who has put his hopes of regulating hedge funds high on the agenda of Germany’s G8 presidency, said: “I could envisage that the initially rather hesitant attitude of the USA and Great Britain could still change before our next meeting, in the light of the current crisis.”

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BACKGROUND

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• A&L reveals sub-prime asset exposure

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• Too much information

Lack of knowledge over the exposures of financial institutions has led to a collapse in confidence. The three-month interbank rate, or Libor, has climbed to 6.7975 per cent, more than a full percentage point above the 5.75 per cent base rate.

Speaking at his monthly press conference, Mr Brown said: “The issue about transparency in relation to some of the financial instruments has been raised and is going to be discussed widely in the international community. We would support greater transparency.”

The Bank of England, which begins its two-day interest rate-setting meeting today, is also under growing pressure to make a public statement on the surge in market interest rates.

Vincent Cable, the Liberal Democrats’ Treasury spokesman, said “This Thursday will provide an excellent opportunity for the Bank to speak up and clarify their view on the current liquidity problems.”

Fears that the UK’s biggest banks have heavier exposure to US sub-prime mortgages than previously believed grew last night when Alliance & Leicester (A&L) became the second bank to reveal that it has tens of millions of pounds invested in risky asset-backed securities.

Britain’s sixth-largest mortgage lender said yesterday that it had £175 million invested in collateralised debt obligations (CDOs) containing US sub-prime mortgages. It is understood that the bank believes that its maximum potential loss on the exposure is £85 million to £90 million.

A&L also said that it had invested only £2.5 million in an SIV-lite - a type of highly leveraged vehicle invested in asset-backed securities - that had recently been forced to restructure after investor demand for commercial paper issued by SIV-lites dried up. A&L said: “None of our CDOs has been downgraded or had their outlook changed by any credit rating agency.” But analysts were surprised at the level of investment by A&L in complex credit products, saying that the announcement could indicate that worse news is waiting at rival banks.

Keefe, Bruyette & Woods, said: “It may raise a few eyebrows over the conduct of the Treasury [wholesale] division in what is essentially a mortgage bank.” Cazenove said: “We expect A&L’s Treasury investments are typical among banks, if not more conservative than most of its peers.”

Last month Northern Rock, the mortgage lender, said that it had £275 million invested in US residential mortgage-backed securities and CDOs.

Meanwhile, turmoil in the credit markets has forced the closure of another hedge fund. Synapse Investment Management said on Monday that it would close a €200 million (£135 million) fund invested in asset-backed securities (ABS) owing to “severe illiquidity” in the market for the investments.

It is thought that Sachsen LB, the troubled German bank that was the fund’s main investor, asked for its money to be returned, causing the fund to collapse. “There was no exposure to US sub-prime, CDOs of ABS, or any other securities whose collateral has recently experienced any underperformance,” Synapse said.

Josef Ackermann, chief executive of Deutsche Bank, Germany’s biggest bank, admitted yesterday that credit turbulence had “inevitably affected” the bank. “Market corrections, triggered in part by the drying-up of liquidity, have been significant and impacted market-to-market valuations in our trading books and leveraged loan book,” Mr Ackermann said.

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