Britain's banking system repeatedly came within hours of gridlock when the euro began trading at the start of the year, senior industry sources have revealed belatedly. Chaos threatened to engulf the payments systems between Europe's banks and only the deployment of emergency plans devised by a group of more than 30 of the region's largest banks - known as the Heathrow Group, after the London airport location used for meetings - ensured that problems remained largely under control.
The existence of 20 different payments systems meant money being transferred from one country to another often ended up in the wrong place. That meant the receiving bank might have been short of funds to pay other debts and any hint of default would be regarded as disastrous.
At the time the euro was launched, the investment bank Warburg Dillon Read warned that at least one European institution had made the same payment five times over, totalling £400m.
Congestion in the system also meant some banks received huge inflows of funds last thing in the day and were unable to invest them in the interbank market so that large interest payments were lost. It forced many banks to borrow, expensively, billions of euros which are not usually necessary. This unprecedented scale of overnight borrowing lasted for more than two weeks.
Money did not go missing, one senior source said: 'The system was never out of balance in terms of total liquidity - it was just that it wasn't quite where it should have been.' Traditionally a payment instruction in German marks would clear in Frankfurt while one in French francs would clear in Paris: The multinational nature of the euro ended this. Another senior banker said the settlement systems designed for the launch of the euro had 'suffered a degree of indigestion' but, he added, most of the problems had been overcome.
A complex web of negotiations is under way between major British and continental lenders seeking to recoup interest lost when payments were not made on time or additional interest had to be paid. The Heathrow Group devised a 'no fault' compensation system which is being put into operation.
'Some banks had to go out and find funding of billions of euros to ensure they could close their positions at the end of the day,' said one executive. Particular problems were experienced by some banking groups in Germany, France, Holland and Austria.
'When it all started going belly-up at the beginning of euro trading, the banks in the Heathrow Group got things moving. There was a danger of payments gridlock but we worked together to try to avoid these difficulties,' recalls one of the executives involved. 'It was a very, very valuable group and we need something like that worldwide to cope with the Year 2000 problem.' The Bank of England - whose role in smoothing the launch of the euro was yesterday described by one banker as 'superb' - has attempted to play down the market's difficulties for fear of sparking a cash crunch for the banks and fuelling alarms about what might happen to the system at the millennium.
Bank executives know the financial system is dependent on consumer and business confidence and that anything which damages it could undermine the sector's prosperity.
