11/09/2008
BoE Outlines Plans To Special Liquidity Scheme
The Governor of the Bank of England Mervyn King has announced it is issuing a new lending scheme next week, but warned it would not provide long-term funding for banks who have raised billions in a bid to strengthen their finances since the credit crunch hit.
The Special Liquidity Scheme will allow banks to swap hard-to-trade mortgage assets for one-year government debt for a six month period. The debt can be rolled over for up to three years.
Speaking to MP's on the Treasury Select Committee, Mr King said: "In the UK we face a difficult, but temporary, period during which inflation will remain high for a while and output growth at best weak.
"Perhaps of even greater significance for demand, real take-home pay has been squeezed by rises in energy and food prices, so holding back household spending.
"My view certainly is that we are going to see a large increase in unemployment. The October numbers are going to start to see a big kickthrough and that is going to be an unpleasant shock."
The Debt Management Office will supply the Bank of England with the necessary Treasury Bills. Banks will be able to swap for those Bills a range of high-quality assets, including AAA-rated securities backed by UK and European residential mortgages. But to prevent banks relying on the Scheme to finance new lending, they will be able to swap securities formed only from loans that were already on their balance sheets at the end of 2007.
Given its scale, the Scheme is indemnified by the Treasury, but is designed to avoid the public sector taking on the risk of potential losses. Banks will need, at all times, to provide the Bank of England with assets of significantly greater value than the Treasury Bills they have received. If the value of those assets were to fall, the banks would need to provide more assets, or return some of the Treasury Bills. And if their assets pledged as security were to be down-rated, the banks would need to replace them with alternative highly-rated assets.
Usage of the scheme will depend on market conditions. Discussions with banks suggest that use of the scheme is initially likely to be around £50bn.
(CD/JM)
The Special Liquidity Scheme will allow banks to swap hard-to-trade mortgage assets for one-year government debt for a six month period. The debt can be rolled over for up to three years.
Speaking to MP's on the Treasury Select Committee, Mr King said: "In the UK we face a difficult, but temporary, period during which inflation will remain high for a while and output growth at best weak.
"Perhaps of even greater significance for demand, real take-home pay has been squeezed by rises in energy and food prices, so holding back household spending.
"My view certainly is that we are going to see a large increase in unemployment. The October numbers are going to start to see a big kickthrough and that is going to be an unpleasant shock."
The Debt Management Office will supply the Bank of England with the necessary Treasury Bills. Banks will be able to swap for those Bills a range of high-quality assets, including AAA-rated securities backed by UK and European residential mortgages. But to prevent banks relying on the Scheme to finance new lending, they will be able to swap securities formed only from loans that were already on their balance sheets at the end of 2007.
Given its scale, the Scheme is indemnified by the Treasury, but is designed to avoid the public sector taking on the risk of potential losses. Banks will need, at all times, to provide the Bank of England with assets of significantly greater value than the Treasury Bills they have received. If the value of those assets were to fall, the banks would need to provide more assets, or return some of the Treasury Bills. And if their assets pledged as security were to be down-rated, the banks would need to replace them with alternative highly-rated assets.
Usage of the scheme will depend on market conditions. Discussions with banks suggest that use of the scheme is initially likely to be around £50bn.
(CD/JM)
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