That’s the £50bn Special Liquidity Scheme, as unveiled by the Bank of England on Monday morning.
Selected highlights below.
The scheme has three key features:
- The asset swaps will be for long terms. Each swap will be for a period of 1 year and may be renewed for a total of up to 3 years.
- The risk of losses on their loans remains with the banks.
- The swaps are available only for assets existing at the end of 2007 and cannot be used to finance new lending.
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Banks will be able to enter into new asset swaps at any point during a six-month window, starting today. Those swaps will be for a term of one year. Banks will be able, at the discretion of the Bank of England, to renew them each year for, at most, a total of three years. After that, the scheme will close. The length of these transactions will provide banks with the certainty about liquidity that is needed to boost confidence. During the lifetime of an asset swap, banks will be required to pay a fee based on the 3-month London interbank interest rate (Libor).
The Debt Management Office will supply the Bank of England with the necessary Treasury Bills. Banks will be able to swap for those Bills a range of high-quality assets, including AAA-rated securities backed by UK and European residential mortgages. But to prevent banks relying on the Scheme to finance new lending, they will be able to swap securities formed only from loans that were already on their balance sheets at the end of 2007.
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Banks will be required to pay a fee to borrow the Treasury Bills. The fee charged will be the spread between the 3-month London Interbank interest rate (Libor) and the 3-month interest rate for borrowing against the security of government bonds, subject to a floor of 20 basis points.
This scheme will be completely ring-fenced from and independent of the Bank of England’s money market operations. So it will not interfere with the Bank’s ability to implement monetary policy.
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The Bank of England will decide the margin between the value of the Treasury bills borrowed and the value of the assets banks are required to provide as security. For example, if a bank were to provide £100 of AAA-rated UK residential mortgage-backed securities, it would, depending on the specific characteristics of the assets, receive somewhere between £70 and £90 of Treasury Bills.
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The main category of assets will be securities backed by residential mortgages. Securities backed by credit card debt will also be eligible. These assets will be high quality – rated as AAA. If the assets were to be down-rated, banks would need to replace them with AAA assets. The facility will not accept raw mortgages and none of the underlying assets can be derivative products. The Bank of England routinely accepts assets denominated in currencies other than sterling. It will not accept securities backed by US mortgages.
More details in this document, including the “haircuts” applied to various assets.