The Special Liquidity Scheme was designed to provide that support on a one-off basis, in large size and for a long maturity. The form of the Scheme was an asset swap (effectively a collateral upgrade). For a fee, the commercial banks were lent nine-month Treasury bills against a broad set of eligible collateral. In practice the collateral received in the Scheme was dominated by own-name residential mortgage backed securities (RMBS and covered bonds). The banks could use the Treasury bills to raise liquidity in the market, at a time when the primary, secondary and repo markets for RMBS were all closed. These bills were also eligible in the Bank’s repo operations. The Scheme was limited to lending against collateral that was held on balance sheet at the end of 2007. The principle was that the Bank shouldn’t support the banks in issuing new securities for which there might not be a private market or to subsidise new lending. 12 The fact that the Special Liquidity Scheme was a form of asset swap meant that it had no impact on the supply of central bank money and thus no direct implications for monetary policy. Following standard accounting practice, it was not on the Bank’s balance sheet. 13 The Scheme will expire at the end of January 2012. It will not be extended or replaced. After three years of large-scale liquidity support the Bank expects each institution to be in a position to fund itself through normal market mechanisms.
In order to prevent a refinancing “cliff” at the end of 2011, the Bank has had bilateral discussions with the main users of the Scheme to ensure that there are credible funding plans in place to reduce their use of it in a smooth fashion. Of the £ of Treasury bills initially advanced, some £ has already been repaid. The Discount Window Facility Alongside the Operational Standing Facilities to cope with short-term frictional shocks, and Long-Term Repos to cope with system-wide liquidity shocks, the Bank’s Discount Window Facility offers large-scale liquidity support for idiosyncratic as well as system-wide shocks. The Discount Window was launched during the heart of the crisis in October 2008. It allows banks and building societies to borrow gilts against a wide range of collateral, at fees reflecting the type of that collateral and the size of the drawing relative to the size of the firm. Although similar in principle, the Discount Window is not intended to be a direct replacement for the Special Liquidity Scheme. It is both shorter-term and more expensive in steady-state, in line with the underlying principles for all the Bank of England’s permanent liquidity insurance operations: that commercial banks should be incentivised to manage their liquidity risk prudently in the market. The terms were also designed to protect the Bank against risk to its own balance sheet. Transactions under the Discount Window facility are intended to be for a maximum 30 days, although they can be rolled.