By Heather Stewart
Britain's battered banks have borrowed a total of £185bn from the Bank of England in just nine months under the Special Liquidity Scheme, the emergency measure set up last April to relieve them of some of their toxic debts and unblock the credit markets.
The SLS, which was designed to remove the need for further bank bail-outs, allowed financial institutions to swap hard-to-value securities, including "toxic" mortgage-backed debt, for more liquid government bonds, over a term of up to three years.
Because taxpayers' money is at stake under the scheme, the Bank has demanded "haircuts", insisting that the 32 participating banks pledge securities worth considerably more than the gilts they received.
The SLS closed at the end of January, and in a statement published today, the Bank reported that, as a result, it is now sitting on a pile of securities with a face value of £287bn. Most of these are mortgage-backed securities, or residential mortgage covered bonds.
"The haircuts are designed to protect against the risk of loss in the event of a counterparty defaulting, and are therefore set taking into account uncertainty about possible valuations of the Bank's collateral, including in the event of default," the Bank said.
It estimates these securities are now worth £242bn; but the difficulty of valuing toxic debts has been at the heart of the credit crunch, and crisis-hit banks have been forced to take repeated writedowns over the past 12 months as they acknowledge that they are worth far less than first thought.
However, the Bank insists that if the value of assets continues to fall over the next two years, eroding its safety cushion, it will "call for margin" – demand that the participating banks hand over more securities.
The Bank will release more details this week of how it will spend a £50bn "asset purchase facility", a fund set up to buy corporate bonds and other assets, in yet another attempt to free up lending to firms, and drive down interest rates – and the first tentative step towards the radical measures known as "quantitative easing".
The Bank's monetary policy committee will gather on Thursday for its two-day meeting to set interest rates, and is widely expected to vote for another cut, taking borrowing costs below their current historic low of 1.5%.
TheGuardian.co.uk
