Details out this afternoon of the BoE’s asset purchase facility:
The Bank has been authorised to purchase up to £50bn of high-quality private sector assets under this Facility. The following sterling assets are initially eligible for purchase: commercial paper, corporate bonds, paper issued under the Credit Guarantee Scheme (CGS), syndicated loans and asset-backed securities created in viable securitisation structures.
Now covering as it does corporate bonds, CP and asset-backed paper, we reckon £50bn isn’t really that much. Then again, to flip that coin, £50bn of credit risk is quite a lot for the taxpayer to be on the hook. (Unlike liquidity schemes, which mitigate credit and market risk by being limited and short-term in duration, this is rather different, and really is quite a risky proposition for a central bank to be engaging in.)
We’re most curious about the effect this scheme may have on the secondary corporate bond market, however.
We suppose that the potential effect of BoE secondary market bond purchases as broad price-supporting actions could be a big help to exposed institutions like pension funds and insurance giants who are poised to reap the whirlwind in the coming default cycle. As the BoE states:
The Bank is minded to be in the market to make regular small purchases of a wide range of high credit-quality corporate bonds, in order to aid secondary market liquidity.
Which is basically the BoE saying that it hopes to fight Mr Market.
Good luck, frankly – £50bn is a rather pitiful warchest with which to try and provide price-support against the most vicious corporate default cycle since the great depression.
Perhaps the BoE knows that too – because its not jumping straight into the deep end of the secondary market straight away. The initial focus would be on facilitating market-making by banks and dealers. The broad framework for such an approach is set out below.
In other words, to start with, the BoE is going to be acting as a sub-underwriter to ensure a continuing supply of credit stays available to would be issuers.
Related link:
HMT actions summary – FT Alphaville
From light touch to ham fist: the FSA’s new short regime – FT Alphaville