Many banks are preparing to shun today’s auction of £10 billion of three-month loans by the Bank of England, the new emergency finance facility put in place by Mervyn King, the Governor, in his policy U-turn last week.

While a few days ago banks were clamouring for the emergency finance, the commercial money markets have freed up in the past few days and the Bank’s terms look by contrast prohibitively expensive, bankers say. One senior banker said his bank would now be able to borrow significantly more cheaply elsewhere and was unlikely to tap the Bank’s pioneering auction today.

Libor, the rate at which banks borrow from one another, has drifted down and last night stood at 6.35 per cent, 0.4 per cent lower than the minimum 6.75 per cent at which the Bank is offering to lend.

One banker said the Bank finance was also less attractive because of the potential stigma of having to borrow from the lender of last resort.

Mr King surprised the financial markets last week when he recanted his previous preference not to provide three-month loans to the banks and announced plans for four auctions of such loans. He also decided to relax the rules governing the assets the Bank would accept as collateral.

Today’s auction opens at 11am, when banks and building societies have half an hour to put in bids for loans. Two weeks ago banks were clamouring for the Bank to follow the example of the US Federal Reserve and European Central Bank and extend three-month credit, which had become hugely expensive as banks hoarded cash and liquid securities.

After the Northern Rock run Mr King changed his policy a day before appearing before the Treasury Select Committee.

Three further auctions of three-month money are due on October 2, October 10 and October 17. The Bank declined to comment last night.

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