Central Bank's Liquidity Scheme For £185bn Value By UK Lenders

It has been revealed that UK banks and building societies owed £185bn through the Bank of England's urgent assistance facility, formed last March in order to stop UK banks being carried down by their holdings of unsellable mortgage-backed debt.

The special liquidity scheme was framed as a provisional crutch for UK banks whereas credit markets were held up leaving them incapable to relieve of assets they had produced before 2008.

Primarily, demand was anticipated to arrive at £50bn and the scheme was to be open for six months from April previous year.

On the other hand, as the global monetary crunch deteriorated with the breakdown of Lehman Brothers last September, the Bank extended the scheme to January 30 and set about producing a permanent successor that is the discount window, established in October.

According to the UK banks, "The exclusive liquidity scheme has assisted its purpose concerning the overhang of illiquid assets on balance sheets up to the end of 2007."

Banks further added that "However monetary situations have continued to be tough and as a result further measures have been established."

By means of the scheme, banks can exchange illiquid bonds for UK government Treasury bills in order to use as collateral for owing from the money markets.

The scheme and similar backing in the eurozone turned to a peaceful growth in the formation of mortgage-backed bonds previous year. The volume of deals was a record €269bn in the UK, while nothing were sold to investors.

It has been exposed by the UK banks that it had taken in £287bn of mostly mortgage-backed securities and covered bonds, but that in the present market situations it valued those securities at £242bn, a 16 per cent discount to face value.

However, the bank applies haircuts or discounts to its evaluation of collateral don the basis of length of maturity and the height of risk. The overall lending of £185bn recommends an average haircut on present market values of 23.6 per cent.

News Categories