Another Currency Runs Out: BOE Introduces "Collateral Term Repo Facility" To Deal With Sterling "Shortages"
When yet another central bank, in this case the BOE, proactively uses the word "shock" in relation to funding deficiency (in this case the GBP) if even with the phrases "contingency" and "there is currently no shortage" a brief week after the global central bank cartel did the same to assure the world of USD funding availability, it may be time to wonder i) just how bad is the global FX crunch in any currency (EUR most certainly included - see near record ECB deposit facility usage), ii) just how broken is the shadow banking system - as a reminder with Lehman it was money markets (a major component of shadow liquidity), now it is repo (smaller, but still critical component of shadow banking) that is failing and iii) when will this crisis escalate to the next logical step?
Introduction of the Extended Collateral Term Repo Facility
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. 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.
The ECTR Facility will form part of the Sterling Monetary Framework and is reflected in an update to the Bank’s “Red Book”. In conjunction with the Indexed Long-Term Repo (ILTR) operations, and the permanent availability of the Discount Window Facility (DWF) for bilateral transactions, the ECTR Facility will give the Bank the ability to ensure that the banking sector has a sufficient access to sterling liquidity to mitigate risks arising from unexpected shocks.
Operations under the Facility will be announced at the discretion of the Bank to respond to actual or prospective market-wide stress. The operations would offer sterling for 30 days against collateral pre-positioned for use in the Bank’s Discount Window Facility (DWF). All firms registered for access to the Bank’s DWF would be eligible for ECTR operations. The size of any ECTR operation would be announced the day prior to the operation. Further operational details are available in the accompanying Market Notice.
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