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27 mins ago
David Milliken and Fiona Shaikh
The Bank of England will launch a scheme next week that allows it to bypass banks and effectively lend direct to companies in its latest efforts to reverse the effects of the credit crunch on the British economy. Skip related content
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The Bank of England said on Friday that under its 50 billion pound Asset Purchase Scheme, it would buy investment-grade sterling paper issued directly by big British companies as well from banks via the secondary market.
"This could channel funds directly to parts of the corporate sector whilst also underpinning secondary market activity ... and so removing obstacles to corporate access to capital markets," the Bank said.
The scheme will launch on February 13, and short sterling futures jumped on the news as traders priced in a reduction of the cost of interbank funding.
"It's one of the first measures we've seen during the crisis which in essence bypasses the banks (and) allows corporates to borrow directly from the Bank of England," said Jonathan Loynes, chief European economist at Capital Economics.
"So in that sense you could possibly see it as a first admission that banks are not going to get back to normal conditions in the foreseeable future."
Bank Governor Mervyn King has said that banks' failure to lend to businesses and consumers poses the single biggest threat to the economy as it faces its sharpest downturn in decades.
The central bank has slashed rates by 400 basis points since October, but lending conditions remain tough and firms are struggling to raise alternative finance from capital markets.
The Bank said it wanted to start buying corporate bonds -- which have maturities measured in years -- as well as the shorter-term commercial paper "as soon as possible," and was consulting dealers.
But in this case it was only considering buying "modest" quantities to facilitate market-making rather than subscribing directly to corporate debt issues.
MORE ASSETS, CURRENCIES?
The Bank said it would consult on extending the scheme to include syndicated loans and asset-backed securities with viable securitisation structures, as well as how it should help the market for bank debt covered by the government's Credit Guarantee Scheme.
"The Bank will keep under review whether there is a case for proposing to the Chancellor (Alistair Darling) that the list of eligible assets or currencies could usefully be expanded," the Bank said in the statement.
The Bank asset purchase scheme, which was announced last month, does not increase the money supply as the Bank will sell treasury bills to banks to fund the scheme, soaking up the money which it gives out in return for the commercial paper.
The scheme lays the groundwork for a policy of so-called "quantitative easing" if policymakers deem this necessary should interest rates approach zero.
The Bank would need permission from Chancellor Alistair Darling to stop selling treasury bills to fund asset purchases, meaning the scheme would boost the money supply.
* For a full text of the BoE statement, go to Bank of England|Markets
27 mins ago
David Milliken and Fiona Shaikh The Bank of England will launch a scheme next week that allows it to bypass banks and effectively lend direct to companies in its latest efforts to reverse the effects of the credit crunch on the British economy. Skip related content
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- Related Hot Topic: Financial Crisis
Have your say: Financial Crisis
The Bank of England said on Friday that under its 50 billion pound Asset Purchase Scheme, it would buy investment-grade sterling paper issued directly by big British companies as well from banks via the secondary market.
"This could channel funds directly to parts of the corporate sector whilst also underpinning secondary market activity ... and so removing obstacles to corporate access to capital markets," the Bank said.
The scheme will launch on February 13, and short sterling futures jumped on the news as traders priced in a reduction of the cost of interbank funding.
"It's one of the first measures we've seen during the crisis which in essence bypasses the banks (and) allows corporates to borrow directly from the Bank of England," said Jonathan Loynes, chief European economist at Capital Economics.
"So in that sense you could possibly see it as a first admission that banks are not going to get back to normal conditions in the foreseeable future."
Bank Governor Mervyn King has said that banks' failure to lend to businesses and consumers poses the single biggest threat to the economy as it faces its sharpest downturn in decades.
The central bank has slashed rates by 400 basis points since October, but lending conditions remain tough and firms are struggling to raise alternative finance from capital markets.
The Bank said it wanted to start buying corporate bonds -- which have maturities measured in years -- as well as the shorter-term commercial paper "as soon as possible," and was consulting dealers.
But in this case it was only considering buying "modest" quantities to facilitate market-making rather than subscribing directly to corporate debt issues.
MORE ASSETS, CURRENCIES?
The Bank said it would consult on extending the scheme to include syndicated loans and asset-backed securities with viable securitisation structures, as well as how it should help the market for bank debt covered by the government's Credit Guarantee Scheme.
"The Bank will keep under review whether there is a case for proposing to the Chancellor (Alistair Darling) that the list of eligible assets or currencies could usefully be expanded," the Bank said in the statement.
The Bank asset purchase scheme, which was announced last month, does not increase the money supply as the Bank will sell treasury bills to banks to fund the scheme, soaking up the money which it gives out in return for the commercial paper.
The scheme lays the groundwork for a policy of so-called "quantitative easing" if policymakers deem this necessary should interest rates approach zero.
The Bank would need permission from Chancellor Alistair Darling to stop selling treasury bills to fund asset purchases, meaning the scheme would boost the money supply.
* For a full text of the BoE statement, go to Bank of England|Markets
