Special Liquidity Scheme extended

by Gill Montia

Story link: Special Liquidity Scheme extended

The Bank of England has extended its Special Liquidity Scheme (SLS).

The scheme was introduced in April and has become a lifeline to UK mortgage lenders by providing regular injections of cash and allowing them to swap mortgage-backed securities for Treasury bills.

The market for mortgage securities has been virtually frozen since the credit crisis took grip last summer and the swaps meant that lenders could use their Treasury bills as collateral for funds raised in the wholesale money markets.

The Bank’s governor, Mervyn King, is known to be extremely resistant to extending the scheme, which should end on 21st October but recent events in the US and UK banking sectors have seen the facility extended to 30th January 2009.

When it was introduced, the Bank and the Government said they expected the SLS to involve at least £50 billion in funding.

The activities of the scheme are shrouded in secrecy, however, earlier this month UBS, the Swiss investment bank, estimated that British banks may have already borrowed as much as £200 billion.

It is understood that the SLS will be replaced by another lending facility in January, details of which have yet to be revealed.