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Opinion

BoE: When is a bail-out not a bail-out?

The Bank of England’s special liquidity scheme does nothing that hasn’t already been done by the Fed and the ECB – except on more onerous terms.

Criticism of the Bank of England’s special liquidity scheme as an unwarranted bail-out of UK banks misses the point. The scheme creates a level playing field for them to compete against US and eurozone financial institutions that already enjoy similar facilities.

The Federal Reserve’s decision to replicate the arrangement by which European Union eurozone banks have been able to monetize bonds backed by mortgages into hard cash on repo was driven by the fear that US broker-dealers were vulnerable to insolvency. Similar concerns presumably lay behind the UK government’s decision to underwrite the Bank of England’s new facility.

With covered bond and RMBS markets shut, and senior unsecured funding avenues extremely expensive, UK banks were in a hole. The BoE has given them a spade to dig themselves out, when they would prefer a mechanical digger.

The BoE is desperate that the offer should not be seen as a bail-out. The onerous terms reflect that. With moral hazard at the forefront of his mind, the BoE’s governor, Mervyn King, states that the scheme is designed to increase liquidity in the system purely to protect the wider economy and not to save the skins of irresponsible lenders.

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