Forget the BoE’s SLS. Consider HMT’s VSLS:
Specifically the Government will make available to eligible institutions for an interim period as agreed and on appropriate commercial terms, a Government guarantee of new short and medium term debt issuance to assist in refinancing maturing, wholesale funding obligations as they fall due.
The government, in other words, is providing a huge liquidity backstop to the UK banking sector. The success of which, though, will not be a UK affair. Chancellor Darling has said the scheme “guarantees interbank lending”, which on the face of things, doesn’t appear to be strictly the case. In fact, it seems the Chancellor is guaranteeing short term debt instruments.
Which means HMT must be confident that US commercial paper markets are going to ease. And that isn’t so much a factor of interbank lending as it is the health of money market funds. It won’t matter a jot how confident British banks are feeling on the back of the HM Capital if there’s no confidence in the US market.
Subject to further discussion with eligible institutions, the proposal envisages the issue of senior unsecured debt instruments of varying terms of up to 36 months, in any of sterling, US dollars or Euros. The current expectation is that the guarantee would be issued out of a specifically designated Government-backed English incorporated company.
How will the funding for this entity be arranged, we wonder?
Consider: unlike like the SLS, this isn’t a repo or a collateral swap. The government would be outright buying commercial paper — paper which is unsecured. As for the amount…
The Government expects the take-up of the guarantee to be of the order of £250bn, and will keep this under review alongside ongoing monitoring of capital positions and lending volumes.
