The Bank of England released details on their new Indexed Long-Term Repo (ILTR) and Contingent Term Repo Facility (CTRF) programs. This is part of the Bank of England Governor Mark Carney’s effort to insure predictable bank liquidity.
We wrote a post about Carney’s speech (given last October) when he outlined his ideas about liquidity programs, “The Bank of England may have gotten into the collateral transformation business…will the Fed follow?”. Well, no signs of the Fed yet but the BofE’s approach is interesting. The ILTR is for banks borrowing cash. Maturities will be 6 months. Prices will be determined by auction (expressed as a spread to the Bank Rate), with everyone getting cash at the clearing rate. The initial size was pegged at £5bn, although this will be adjusted as demand patterns develop. The BofE will set the amount of cash available in each of three collateral sets (A, B, and C).
From the Market Notice, dated January 16, 2014:
“…Level A collateral comprises certain high-quality highly liquid sovereign securities. Level B collateral comprises high-quality liquid collateral, including other sovereign, supranational, mortgage and corporate bonds. Level C comprises less liquid securitisations, own-name securities and portfolios of loans…”
and
“…Bids will be subject to a minimum bid spread, which is initially set at 0bp for Level A, 5bp for Level B and 15bp for Level C collateral…”
This sounds a lot like the ECB’s LTRO operations. We see the primary differences being:
1.) The LTRO was not on a monthly schedule – more ad hoc.
2.) The LTRO rates were fixed at the average overnight rate during the loan period versus an auction model.
3.) The LTRO priced all collateral the same. The BofE recognizes that lower quality paper will be financed at higher spreads, although the minimum spreads do seem pretty low.
4.) The LTRO did not have size limits. ILTR does but sound pretty flexible.
It will be interesting to see how the market clears in the first auction scheduled for February 11, 2014. It could be a non-event due to lack of demand.
The CTRF program is dormant right now, but can be reinstated at any time.
Governor Carney is taking the Central Bank’s lender of last resort obligation very seriously. Carney declared, in his October speech in honor of the 125th anniversary of the FT, “we are open for business”. One wonders if the same could happen in the US without political blowback about the banks being offered bailouts.
In the FT speech Carney outlined a program where there would be, for lack of a better term, monthly collateral transformation auctions (see minute 16 1/2 of the speech). The BofE would take in a broad range of collateral versus giving out high quality assets. The ILTR program announcement just mentioned cash. Maybe the details changed or the transformation program is still coming? We know that the BofE does these sorts of collateral swaps already in their discount window operations, but they are on an on-demand basis and aimed at banks experiencing some sort of firm-specific or market-wide shock. Borrowings are for a 30 day term at rates set at a premium to the market and have spreads considerably higher than the ILTR minimums.