The Bank of England (BoE), in an effort to enhance the framework for U.K. banks to manage short and long term market liquidity needs, has announced a series of proposals "designed to improve the functioning" of its existing market operations framework and introduce two new permanent facilities. This follows the BoE's most recent move on October 13, 2008, to alter the terms of its respective currency swap arrangements with the Federal Reserve to accommodate unlimited U.S. dollar funding. The BoE, in an effort to de-stigmatize the use of the government's lending facilities, plans the following three major reforms, effective October 20, 2008:
1) Operational Facility - Replace the existing Standing Facilities, as previously introduced in 2006 to allow banks to borrow from and deposit unlimited amounts throughout the day, with the Operational Facility, the clear purpose of which will be to provide rate setting for overnight maturities, thereby absorbing technical problems and imbalances in overnight money-markets. The Bank plans to amend its disclosure of the use of the Operational Facility to remove the possibility of adverse commentary for those banks utilizing the Operational Facility.
2) Discount Window Facility - The principal function of which is to provide liquidity insurance in the event of stress, by allowing commercial banks, at any time, to swap eligible collateral for U.K. government securities, or at the government's discretion, cash. Drawings from the Discount Window Facility will generally be for a 30-day term maturity, although the BoE will have the discretion to extend the maturity.
3) Long Term Repo Options - The introduction, after further consultation, of permanent long-term repo open market operations against broader classes of collateral, to be auctioned under a mechanism where counterparties bid separately and against different types of collateral.
Mervyn King, Governor of the BoE, stated: "These arrangements set out our liquidity provision in a systematic way to help banks plan access to central bank liquidity and so add certainty."