By David Milliken
LONDON Jan 16 British banks will be able to get cash from the Bank of England on easier terms from Feb. 11 onwards to help avoid a repeat of the liquidity shortages that occurred in the financial crisis, the central bank said on Thursday.
They will be able to offer up lower-quality assets than now as collateral. The amount of money available will also fluctuate depending on the market environment rather than being a set amount.
Governor Mark Carney said in October he planned to make it easier for banks to use the lower-quality collateral to get funds - albeit at a price.
He was responding to a review ordered by the central bank's board that said changes since the financial crisis had not gone far enough.
Carney's predecessor, Mervyn King, was criticised by some market participants for being reluctant at the start of the financial crisis to lend banks cash against normally liquid, relatively high-quality assets that could no longer be sold due to market turmoil.
From Feb. 11, banks taking part in the BoE's monthly indexed long-term repo (ILTR) operations to provide funds will be able to use lower-grade collateral that previously could only be used in emergency operations.
"New ILTR auctions (will) provide more liquidity at cheaper rates, longer maturities and against a wider range of collateral than previously available," the BoE said.
There is currently no shortage of liquidity in Britain's financial system, and the BoE said it expected limited demand at the first ILTR for six-month funds on Feb. 11.
Unlike previous ILTRs, the amount of funds on offer is not fixed. Instead the amount of cash available will depend on demand, with a minimum of 5 billion pounds ($8.18 billion)available each month.
"An important innovation in the design of the ILTR auctions is that they are responsive to market conditions, with the amount of liquidity available rising automatically if there is greater demand," the BoE said.
ILTRs will now have three categories of collateral: top-tier government bonds, second-tier government and corporate bonds and a third tier which includes assets such as banks' loan portfolios.
Banks using lower-quality collateral will have to get it pre-approved by the BoE, and more will be required and it will attract a higher interest charge than top-grade collateral.