Banks have borrowed £185billion of taxpayers' money

04 February 2009 / by Rachael Stiles
Britain's banks have borrowed £185billion of taxpayers' money through the Bank of England, it has announced, as part of the Special Liquidity Scheme to help the banks survive the financial crisis.

In what BBC business editor Robert Peston has deemed a "draw-dropping measure of the failure of the banking system over the past nine months", while the scheme has been in place, billions of pounds have been pumped into 32 banks and building societies.

The figure illustrates the extent to which the state has had to step in to prevent a complete collapse of the UK's banking system, and to encourage banks to keep lending and ease the flow of credit in the economy.

The Special Liquidity Scheme (SLS) was introduced in April 2008, intended to "improve the liquidity position of the banking system" by allowing the banks to swap their high quality mortgage-backed and other securities for UK Treasury Bills.

While the drawdown window for the SLS closed at the end of January, the Bank of England will continue to make liquidity support available to participating financial institutions for three years.

"The Special Liquidity Scheme has served its purpose in relation to the overhang of illiquid assets on balance sheets up to the end of 2007." the Bank of England said in a statement. "But financing conditions have remained difficult for banks and building societies and therefore further measures have been introduced by the Bank and HM Treasury to improve financing and credit conditions in the economy."

One of these measures is the Bank's Discount Window Facility, a permanent facility whereby eligible institutions can borrow against a wider range of collateral than with the SLS, which is not limited to assets on balance sheets before a particular date. Only securities formed from loans existing before December 31 2007 were eligible for the SLS.

The amount of money borrowed by commercial lenders "shows you quite how serious it was that the commercial market for mortgage-backed securities had collapsed and quite how desperate the banks were to raise cash." Mr Peston added.

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