playing the game of loans

Looking at the “surprise” PSBR surplus brought back happy memories. In the early 80s the PSBR was big and short term interest rates were high. The inflow of taxes from banks to the public sector on tax days upset the balances of the banks at the Bank of England. The banks could become very “short” and they would bid up the overnight and short term market in consequence to cover their balances. 

This volatility is unwelcome from a monetary policy viewpoint so the Bank of England would lend money back to the market to smooth day-to-day rates.

One January day I was informed that a cheque had been received by the Inland Revenue for £4½ billion. The cheque was drawn against a Sullom Voe bank account in one of the clearing banks. As the bank account was “out of town” the cheque could take four days to clear. A quick calculation put the loss of interest to the exchequer at £½ million so we dispatched the cheque for special presentation, ie. to clear the same day.

Of course, the clearing bank was not expecting that, and nor was its customer, an oil company. The result was that the bank might massively overdraw its settlement account at the Bank of England. Predictably, just before bills we got a call from the bank explaining its predicament. I explained that gaming the clearing was not acceptable to the Exchequer, and that we were prepared to cover the bank’s shortage at a premium rate - and that they should discipline their customer to prevent a recurrence.