Tuesday, February 03, 2009
Handouts and haircuts
Posted by David Smith at 04:00 PM
Category: Thoughts and responses

The Bank of England has provided details of how its special liquidity scheme (SLS), introduced in April 2008 and now replaced by other assistance for the system, has worked. Originally it was thought the Bank would provide around 50 billion of liquidity under the scheme, then Alistair Darling encouraged the idea of a larger number, perhaps 100 billion or more.

In the event, as an announcement from the Bank makes clear, 185 billion was lent under the scheme to 32 banks and building societies, against 287 billion of collateral, mainly in mortgage-backed securities, now valued by the Bank at 242 billion. These are big numbers and underline how desperate the banks were.

The Bank's notice also gives details of the "haircuts" applied in the operation of the scheme - how much the banks had to accept in reductions in the value of their collateral. And, it warns: During the remaining life of the Scheme the Bank will continue to call for margin should the haircut-adjusted value of the collateral fall relative to the value of Treasury bills lent." Taxpayers' interests, in other words, are being safeguarded.