The Bank of England Wants More Collateral Than The Fed

The Wall Street Journal “Banks to Pay Steep Cost in BOE Plan” reports that the Bank of England (BoE) is starting a $100B plan to add liquidity to the UK mortgage securities market. However, the plan has no stated limit. The plan emulates the US Federal Reserve with much higher collateral requirements. The BoE will swap triple-A rated mortgage securities for UK government bonds. While the Fed’s plan is for renewable 28 day cycles, the BoE plan is for an initial one year term, renewable up to three years.

The BoE lending is limited to commercial banks. The BoE at its sole discretion determines the value of the collateral, setting initial guidance at 70% to 90%. The kicker is that the BoE can demand more collateral after the swap is conducted. If the collateral has lost value, the commercial bank would have to either put up more mortgage securities or return a portion of the government bonds. I have not heard the Fed speak of contingent collateral. In fact, the Fed testified to the possibility of losses in the loan supporting JP Morgan’s (JPM) takeover of Bear Stearns (BSC).

The Fed and the BoE do have one significant area of commonality. Both want to prevent the public from knowing which banks are in need of funds. I made a point of this in "National City Highlights the Fed’s Doctrine". Neither the Fed nor the BoE reveals which banks approach the window, though recently some US investment banks volunteered that they tested the Fed. The Fed does immediately report the extent of its lending, a practice the BoE will be discontinuing. The BoE will now be reporting on a six month lag. The BoE wants to prevent a race to identify the troubled banks.

Like the Fed, the BoE got a “volunteer” to admit it will test the window. Barclays (BCS) confirms its interest. It seems that our special relationship with Britain stretches beyond the military. Though I would say the Brits are smarter in their approach.

Speaking of value, the Financial Times “Prices slashed on Chrysler loan sales” reports Goldman Sachs (GS) and Citigroup (C) are selling Chrysler debt for as little as 63%.

Disclosure: Author is long C.

Comments

[Jason Mark]

I agree that we have much in common with the Brits, but to say that the BoE has a smarter approach is wrong. By the BoE discouraging the relase of info about which banks are in need of liquidity and which ones aren't is stupid. Investers want to know this info so that the markets can be fairly evaluated. If there is a 6 month lag in info there will be volital swings in the pricing of financials for another six months. Transparency is what is needed to sort out the market. Lets be honest, most banks large and small are in need of liqidity. Some will raise it by borrowing from the Fed or in England's case the BoE, accept investments from sovreign wealth funds, or attempt to increase deposits by keeping their intrest rates steady in a decreasing rate environment. Let's just come clean so we can put this all behind sooner.

[sivere]

The problem is the $500+trillion derivatives bubble that may pop at any time. This is all the fault of the Fed and other central banks- including the BoE and their policies of the last 20 years (at least). As the derivative bubble was inflated the central banks stood by, even encouraged it with glee. In fact in the US at least, it is the fault of congress who have the constitutional responsibility to administer and maintain a currency and system of credits. Therefor, we need to

TakBackTheFed.com

We need to do it NOW. Let's not sit around and wait fo the crash, open our wallets, and pay for it (not that what is in our wallets will necassarily be woth much). Let's take action now, and save our nation! Let's do so in consultation with the BoE and other allied central banks.

[moneylender]

At last 'severe' had high lighted the crunch factor Even Soars dare not mention the true figure.BOE will be sucked in whether it likes it or not.In 2001 I predicted this crisis, having seen it orchestrated in the Asean.
But as early as in the 70s when i pointed out the creation of money out of NOTHING as a compound interest bearing DEBT enslaving us all from cradle to the grave, I was man handled. You see every one in the US is under control and each and every one is owned from cradle to grave.Each of you owe the private banks U$130,000/ that includes the multimillionaires too, but they have some of their money i tax havens .Smart asses.