Monday, April 21, 2008
The Bank's liquidity scheme
Posted by David Smith at 09:30 AM
Category: Thoughts and responses

The details have been announced of the Bank's liquidity scheme, for which initial take-up is expected to be £50 billion. This is a bold move, under which banks will be able to "swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks. By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets".

The aim is to tackle the "overhang" of asset-backed securities on bank balance sheets, which the Bank says is the factor making them reluctant to lend to each other. According to Mervyn King: “The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.” There will be plenty more to be said about this. In the meantime, here is the Bank's statement.