Mark Carney Announces Liquidity Boost

By Ed Conway, Economics Editor

The Bank of England Governor has unveiled a major overhaul of the way the Bank pumps cash into the markets.

In a speech on Thursday evening to celebrate the 125th anniversary of the Financial Times, Mark Carney revealed that the Bank will be making major changes to the terms under which the Bank provides cash to Britain's financial system.

Though the overhaul itself is unlikely to be noticed by bank customers, policymakers hope that it will help encourage lenders to provide more cash for those who want to borrow.

One of the key ways in which the Bank controls the UK economy, borrowing rates and financial stability is by lending private banks cash in exchange for assets.

However, over the course of the financial crisis it came under fire for offering this so-called liquidity at high prices and in exchange for only the best-quality assets.

The Bank of England will make facilities cheaper

Mr Carney said that the Bank intended to cut the charges for one such facility - the Index Long-Term Repo - and to allow banks to leave collateral of less-stringent quality in exchange for cash.

Whereas previously only high quality assets were acceptable, in future, lesser-quality investments such as mortgage-backed securities will be allowed.

The Bank will also make the terms of its discount window, an emergency short-term lending facility – more generous.

Mr Carney said: "Our facilities are not ornamental. They are there to be used by banks to access money and high-quality collateral. We are offering money and collateral for longer terms.

"The range of assets we will accept in exchange will be wider, extending to raw loans and, in fact, any asset of which we are capable of assessing the risks. And using our facilities will be cheaper. In some cases the fees are being more than halved."

The speech comes only hours ahead of the official announcement of Britain's latest gross domestic product figures.

The Governor indicated that while he was cheered by the recovering economy, the improvement in GDP, which is expected to be strong, was not as broad based as some had hoped. 

He said: "The economy has picked up over the last couple of quarters. We expect the second half to be stronger than the first half, as indicated in our minutes that came out earlier this week.

"We will find out, I'm not so foolish as to try to give a prediction of a number that's going to come out in less than 24 hours so why don't we wait for the GDP report."

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