By Simon Miller
The Bank of England (BoE) is to activate emergency measure offering banks six-month’s liquidity this morning.
Speaking at Mansion House last night, the BoE governor Mervyn King announced the start of the Extended Collateral Term Repo Facility (ECTR) which was introduced in December last year.
The first ECTR auctions will be on 20 June 2012 and will be held at least monthly until further notice and the Bank will offer sterling liquidity on a six month term against collateral pre-positioned for use in the Bank’s discount window facility (DWF).
All firms registered for the DWF will be eligible and the auction will be subject to a minimum of £5bn.
King told Mansion House guests: “The euro-area crisis has had more dramatic moments, in which the ultimate resolution seems to be at hand only to be confounded by subsequent events, than there are episodes in The Killing.”
He added that the effect of the euro-area crisis had been to “create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole”.
“The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead. The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth,” King continued.
Also announced at the dinner was the introduction of a funding for lending scheme that aims to use banks’ assets being swapped with the BoE in return for money that would be lent to customers. Estimated to support up to £80bn in loans, it is hoped to provide funding for an extended period of several years at rates below current market levels and linked to the performance of banks in lending. Backed by the Treasury, the scheme will be run by the BoE and off government books.
Also speaking at the Mansion House dinner, the Chancellor George Osborne commented: “We are not powerless in the face of the euro-zone debt storm. We can deploy new firepower to defend our economy from the crisis on our doorstep. Funding for lending to the family aspiring to own their home and the business that wants to expand. The Government - with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers.”