6.12.2011
By Simon Miller
The Bank of England has offered increased liquidity measures as fears of a credit crunch grow.
The Bank said that in light of the continuing exceptional stresses in financial markets, it was introducing a new contingency liquidity facility, the Extended Collateral Term Repo (ECTR) Facility.
The ECTR is designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.
However, the Bank insisted that there was no current shortage of short-term liquidity in the market.
In a statement, the Bank added: “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 move comes a week after the world’s leading banks enhanced their capacity to provide liquidity support to the global financial system.
The Banks of Canada, England, Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank agreed co-ordinated action to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points – in effect the US dollar overnight index swap rate plus 50 basis points.
The ECTR Facility will form part of the Sterling Monetary Framework and in conjunction with the Indexed Long-Term Repo (ILTR) operations, and the permanent availability of the Discount Window Facility (DWF) for bilateral transactions, the ECTR Facility will “give the Bank the ability to ensure that the banking sector has a sufficient access to sterling liquidity to mitigate risks arising from unexpected shocks”, according to the announcement.
Operations under the Facility will be announced at the discretion of the Bank to respond to actual or prospective market-wide stress. The operations would offer sterling for 30 days against collateral pre-positioned for use in the Bank’s Discount Window Facility (DWF). All firms registered for access to the Bank’s DWF would be eligible for ECTR operations. The size of any ECTR operation would be announced the day prior to the operation.
Further operational details are available in the accompanying Market Notice.
Other stories you may find of interest:
A very British Complex
Greater complexity leads to greater risks for banks according to Professor Simon Collinson, Warwick Business School and the Simplicity Partnership
Fencing off the risk?
The Independent Commission on banking has set the cat among the pigeons with the recommendation to ring-fence retail operations. Simon Miller looks at how this came about and what unintended consequences could arise
Impacting on investment
With emerging markets looking for investment, Simon Miller looks at the rise of impact investment and what risks entails in this socially aware vehicle
