Bank announces crisis lending facility

  Published: December 6, 2011

  The Bank of England has put in place contingency plans for a deterioration in the eurozone sovereign debt crisis, announcing a new short-term lending facility for times of severe market stress.

  Less than a week after six of the major central banks cut the cost of dollar loans, the Bank on Tuesday announced new measures to alleviate concerns that borrowers could face a shortage of sterling liquidity if the situation in the eurozone were to deteriorate.

  Under the measures, the Bank will give borrowers access to month-long sterling loans on signs of a market-wide funding shortage. The Bank stressed that there was, at present, no shortage in short-term sterling liquidity, but precautions were warranted “in light of the continuing exceptional stresses in financial markets”.

  Analysts welcomed the move. Divyang Shah, strategist at IFR Markets, said: “In 2008, the Bank was behind the curve and now they are looking to get ahead of it.”

  Some, however, judged the short-term nature of the support insufficient to counter tensions surrounding the need for UK banks to replace term funding, of which £140bn is set to mature in 2012. David Tinsley, UK economist at BNP Paribas, said: “This is positive, but it will not do a lot for the longer-term issues.”

  Banking stocks diverged after the news. After losses across the sector in early trade, the banks seen as most likely to make use of the facility rose. Lloyds Banking Group traded 3.3 per cent higher at 27.9p and Royal Bank of Scotland was 0.9 per cent stronger at 22.8p. Barclays remained weaker on the day, down 0.9 per cent to 190p as did HSBC, seen as one of Europe’s best-capitalised banks. Its shares were 1.4 per cent softer at 510.8p.

  The size and date of any auctions of sterling loans will be based on market conditions, the Bank said. No operations have been announced so far.

  The loans will be made through a new liquidity facility, known as the extended collateral term repo facility. The Bank will charge a penalty rate of at least 125 basis points above its benchmark rate of 0.5 per cent for month-long loans. As of Tuesday, the interbank rate for unsecured loans was 0.75 per cent.

  It will accept all of the assets that borrowers are able to use through the existing discount window facility. But there is a reputational risk attached to borrowing through the discount window, which also only provides gilts, not cash.

  “The new facility isn’t terribly different from the discount window,” Mr Tinsley said. “But it’s possible it would attract less of the stigma that the use of emergency discount windows can.”

  The Bank said the measures underlined its “commitment to take appropriate measures to maintain monetary and financial stability”.

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