In response to the Bank of England’s Monday announcement that it will acquire UK banks’ mortgage-backed securities for up to three years in return for Treasury bills, Willem Buiter on his Maverecon blog notes that “the actual baby turns out not to be too different from the one expected”.
For the next six months, reports the FT, the Bank will offer to acquire asset-backed securities from banks in exchange for Treasury bills. Based on conversations with commercial banks, the Bank expects to swap £50bn assets in the first couple of months.
With this move, says Buiter, the Bank is now “wholeheartedly committed” to acting as market marker of last resort for systemically important securities for which the markets have become illiquid, not to say defunct, since the start of the crisis in August 2007.
The market maker of last resort “provides market liquidity in the transactions-based model of financial capitalism the same way the lender of last resort provides funding liquidity to banks in the relationships-based model of financial capitalism,” he adds.
The same institution, the central bank, can play both roles. All real-world versions of financial capitalism are convex combinations of the transactions-based model and the relationship-based model.
So I am reasonably pleased that the Bank’s early opposition to this notion has been overcome. It would have been better to have had this facility in place in September 2007, but it is not too late to prevent unnecessary systemic damage to the British banking sector and the negative fallout this would bring for the rest of the UK economy.
