Credit crunch is at our door, shows BOE move

Tuesday, 6th December 2011, 12:58pm

The Continental credit crunch is at our door. The Bank of England has just announced it's set up a facility that will help provide emergency sterling funds in the money markets in case, well, the money dries up.

'In light of the continuing exceptional stresses in financial markets, the Bank of England is today announcing the introduction of a new contingency liquidity facility, the Extended Collateral Term Repo (ECTR) Facility. This Facility is designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.'

The Bank is careful to point out that, at the moment, liquidity is fine:

'There is currently no shortage of short-term sterling liquidity in the market. But should that position change, the new Facility gives the Bank additional flexibility to offer sterling liquidity in an auction format against the widest range of collateral. The introduction of the ECTR Facility underlines the Bank's commitment to take appropriate measures to maintain UK monetary and financial stability.'

So we now have another baleful four-letter acronym, the ECTR, for our troubled times. The Bank's statement – you can read it in full here – is full of other technical terms, but basically the premise is clear.

As in the move by six global central banks last week to pump in liquidity into financial markets – which Governor Mervyn King says he initiated – this domestic move is about providing a ready stream of sterling in case interbank lending grounds to a halt. Above all, the very presence of the ECTR is meant to provide much-needed confidence to financial institutions, markets, businesses, and consumers like you and me.

More articles from: Clarissa Tan | this section

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It doesn't add up...

December 6th, 2011 1:53pm Report this comment

From the BoE Financial Stability Report:

Including funding supported by the SLS and CGS, they [UK banks] have £140 billion of term funding due to mature in 2012, with maturities concentrated in the first half of the year.

Problem solved? N.B. funding is of the same order of magnitude as gilt remit. Expect another three card trick, with the cash being printed.

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