The Bank of England levelled the playing field for UK financial institutions last month when it followed the lead of the Federal Reserve and provided a facility for domestic banks and building societies to refinance mortgage-backed bonds for government bonds. Continental European banks have long been able to use the European Central Bank’s repo facility for their mortgage-backed securities. Until the European securitization market shut down, UK banks were by far its biggest users – accounting for between 40% and 50% of annual issuance over the past three years alone. The Bank of England has carefully constructed its programme to ensure that banks retain all credit risk.
For the next six months, the special liquidity scheme (SLS) enables the swap of treasury bills for triple-A-rated mortgage, credit care, and covered bonds, provided the collateral was originated before 2008. The initial size of the programme is £50 billion ($100 billion) but no absolute limit has been set by the BoE. The swaps last for one year but can roll over for three years.
According to Ganesh Rajendra, head of European ABS research at Deutsche Bank: "The new Bank of England’s special liquidity scheme will ostensibly provide quasi-term funding to banks at Libor flat.