This new framework has yet to be put to the test but the pieces are being put in place to destigmatise borrowing from the central bank at times of market stress.
It highlights the shift in the BoE’s stance, away from focusing on the risks of moral hazard at the beginning of the crisis, to accepting its role as The Lender of Last Resort. Had it done so earlier, maybe GBP LIBOR/OIS spreads might not have blown out beyond those of USD and EUR, and the banking sector might have had fewer casualities.
That’s a lot of maybes, but the BoE has changed its tune and even by the final chapter of governor King’s term there was a desire for banks to be less risk averse to building cash buffers. The ECTR auctions were born out of this desire and now the new governor Carney is extending this approach with the launch of ILTR.
This is essentially an ECB-style LTRO that will allow banks to access liquidity more cheaply, against wider collateral and on longer terms. The announcement was made back in October but the BoE has finally launched the ILTR which will begin on Feb 11. Given that liquidity demand is low and the BoE points out that there is “abundant liquidity”.
The true challenge will come when there is increased demand for liquidity and counterparty risk once again rears its ugly head.