That group is being chaired by Stuart Siddall, Chief Executive of the ACT, and is due to issue a report in the next few months. Syndicated loans and asset backed securities A substantial part of lending to larger UK corporates is normally undertaken via syndicated loans. The Bank investigated whether there was a market failure or illiquidity premium in this market which could be addressed by making APF purchases. After a thorough investigation, the Bank concluded that what was needed was more large-scale bank funding, particularly to replace the foreign bank lenders who had been withdrawing from the UK market. But the appropriate way to address that was through the various schemes in place to support the banks. Similarly, the Bank investigated the state of securitisation markets. Here, there were two problems. First, many investors were extremely wary of buying mortgage-backed securities and similar products, because the crisis had raised uncertainty over their underlying risk characteristics. At the same time there was a huge outstanding stock of such assets already issued, which would swamp any operation aimed at improving liquidity. In the United States the authorities have undertaken substantial purchases of mortgage-backed securities, and funded the purchase of other securitised assets. It is not clear yet whether those markets will be self-sustainable once official intervention comes to an end. In the United Kingdom, we have made a range of ABS, including mortgage backed securities, eligible collateral in the Bank’s permanent liquidity insurance facilities as well as in the SLS.
2  BIS Review 23/2010  detailed characteristics serve to make several points in the context of this talk. The SLS did not provide the banks directly with funding. Rather it swapped illiquid private sector assets held by the banks for highly liquid treasury bills borrowed from the Debt Management Office. The commercial banks then obtained their funding from the market by repo of the treasury bills. Essentially the SLS provided a temporary collateral upgrade for the banks. By the time the scheme closes, SLS participants need to have either generated alternative sources of funding or created alternative collateral which the market will be willing to hold in place of the treasury bills. Recently, there have been some calls from interested parties for the SLS to be extended beyond its three-year horizon. If the SLS were to be extended, that would mean an implicit subsidy for specific banks. Albeit for a fee, those banks would be funding on an ongoing basis their illiquid, risky assets, by borrowing at “risk-free” government interest rates. That would give a significant competitive advantage to banks that had most recourse to the SLS. But central bank operations are not carried out to protect individual banking franchises, they are there to ensure overall monetary and financial stability. As the Governor has already made clear, the SLS will close at the end of January 2012.