Bloomberg News

BOE Starts New Sterling Liquidity Facility as Crisis Spirals

December 07, 2011

(Updates with comments from economists starting in seventh paragraph, U.K. bank funding in 10th.)

Dec. 6 (Bloomberg) -- The Bank of England introduced a new sterling liquidity facility to address potential financial- market strains as Europe’s sovereign debt crisis intensifies.

The central bank announced the move “in light of the continuing exceptional stresses in financial markets,” it said in a statement in London today. “This facility is designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.”

The measure comes a week after the Bank of England, the Federal Reserve and four other central banks made it cheaper for banks to borrow dollars in emergencies and agreed to create temporary bilateral swap programs to provide funding if needed in each central bank’s currency. The moves indicate officials are taking preemptive measures in case Europe’s debt crisis escalates further and freezes markets.

Today’s operation is “there as a backstop,” Brian Hilliard, an economist at Societe Generale SA in London, said in a telephone interview. “It’s not designed for use at the moment; it’s for exceptional circumstances which the bank doesn’t want to occur, but wants to be ready for.”

The Bank of England’s Extended Collateral Term Repo Facility will provide funding against the widest range of collateral and will help ensure that banks have sufficient access to sterling liquidity “to mitigate risks arising from unexpected shocks,” the bank said.

‘Additional Flexibility’

“There is currently no shortage of short-term sterling liquidity in the market,” it said. “But should that position change, the new facility gives the bank additional flexibility to offer sterling liquidity in an auction format against the widest range of collateral,” the central bank said.

Today’s move “signals that the bank thinks there is a reasonable chance” stresses will arise in the sterling money markets, said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London and a former Bank of England official. “It’s wise to be prepared in advance and to let the market know you are prepared in advance.”

The new facility’s operations will offer sterling for 30 days against collateral currently allowed for use in the bank’s Discount Window Facility and is open to all banks and building societies that are signed up to the DWF.

The Bank of England said that operations under the ECTRF will be announced “at the discretion of the bank to respond to actual or prospective market-wide stress.”

2012 Funding

U.K. banks have 140 billion pounds ($219 billion) of term funding due to mature in 2012, concentrated in the first half of the year, according to the central bank. Short-term money-market funding conditions have been “fragile over the past few months, with banks finding it harder to roll over all of their maturing funding,” it said on Dec. 1

“If current market tensions continue into 2012, replacing that funding is going to be real struggle, which will put further pressure on funding costs and deleveraging,” said David Tinsley, an economist at BNP Paribas SA in London. “The provision of a mechanism to address short-term funding problems in the financial sector is a positive sign from the bank, but it will not do a lot for the longer-term issues.”

--Editors: Fergal O’Brien, Simone Meier

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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