Way back in October of 2009, a little over one year after the collapse of Lehman froze money markets and nearly brought down the entire global financial system, we brought you a rare and fascinating look at what goes on at the Fed’s discount window when financial armageddon is playing out before everyone’s very eyes.
We won’t delve into the specifics now (you can revisit them for yourself here [8]), but suffice to say that in the days after Lehman's bankruptcy, over $50 billion in securities had been assumed by the Fed via FRB and DTCC programs, which also included anywhere between $3 billion and $4.5 billion in equities. In other words: the Fed was lending against a portfolio of stocks (which amusingly included 5,136 shares of recently bankrupt retailer Shaper Image).
Seven years later and it appears as though the UK is set to dust off the Fed’s Lehman lending playbook because as The Telegraph reports [9], the BOE is looking at making equities eligible for repo ops. Here’s more:
Banks could be able to offer the Bank of England shares as collateral under a scheme being considered by officials, executive director Chris Salmon has revealed.
Currently, banks can offer assets such as asset-backed securities, government bonds and pools of loans as collateral to ensure the central bank does not lose its money. In future, they could be able to offer shares, too.
Although the haircut on equities has not yet been decided, it is likely to be substantial. Share prices are volatile, and could be prone to particularly large swings just at the time a bank might want to offer equities to access Bank of England funding.
"The Bank has started work to ensure there are no technical obstacles to our ability to accept equities as collateral should the need arise," said Mr Salmon.
“Given the complexities involved, the project will take some time to deliver, and we currently anticipate that work to remove technical obstacles will continue throughout 2015 and 2016.”
The Bank's acceptance of a very wide range of collateral has formed a key part of the Funding for Lending Scheme since 2012, alongside emergency funding schemes in which banks have limited access to affordable funding from the market.
Ostensibly, the shift will simply give banks "more options" when it comes to obtaining funding for lending, but the question here seems to be this: where's the fire?
That is, what's prompting the BOE to study ways around any "technical obstacles" that might prevent it from accepting stock in repo ops?
It seems as though someone, somewhere, may have a liquidity problem and suddenly needs to put up its equity book for cash. File this one away in the box labeled "possible black swan" for now. We imagine we'll be revisiting it in the not-so-distant future.
