Bank will overhaul liquidity scheme to prevent future financial crisis

17 October 2008 / by Rachael Stiles
The Bank of England has announced it is to overhaul its money market rules to make them more effective in any future financial crises.

The plan is to put news rules in place that will be permanent and not need to be modified when times get tough. The new system will allow lenders immediate access to short term emergency funding in times of financial difficulty.

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The changes involve three main elements, the first, to be introduced on Monday, is the replacement of the existing 'Standing Facilities' with 'Operational Standing Facilities'.

"The clear purpose of which will be to absorb technical problems and imbalances in the operation of money markets and payments and not to provide support to stressed firms," the Bank says.

The second measure, also to be introduced on Monday, will be the establishment of a 'Discount Window Facility', which will enable banks to borrow gilts or cash against a wide range of eligible collateral. The aim of the facility is to provide "liquidity insurance to commercial banks in the event of stress".

The third, which will not be introduced until further consultation on its details have taken place, will see the bank accept wide collateral in its regular longer-term monthly auctions of cash. The idea is to put in place a system that allocates cash between different forms of assets.

The Bank of England says that the new framework will provide a wider range of options in tough economic times. "These arrangements set out our liquidity provision in a systematic way to help banks plan access to central bank liquidity and so add certainty," said Bank of England Governor Mervyn King.

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