LONDON (MNI) – A review into the Bank of England’s provision of
emergency liquidity assistance at the height of the financial crisis in
2008/9 says that the scheme probably prevented the collapse of major
banking groups HBOS and RBS and urges the BOE to act quickly in the
event of another financial institution finding itself in serious
difficulty.

The Plenderleith Review into the provision of ELA says that in
situations where the BOE knows an institution is in trouble, it should
consider acting pre-emptively to provide liquidity to that institution.
It approves of the BOE’s use of ELA back in 2008/9, saying the central
bank achieved is key aims of tackling a threat to systemic stability and
giving itself an exit route.

In future, however, veteran central banker Ian Plenderleith
suggests in the review that the BOE could act even before a bank finds
itself in dire need of support.

“In situations where the Bank is aware of a bank experiencing
escalating liquidity strains, the Bank could consider whether it might
act pre-emptively to provide bilateral liquidity support before the need
definitively crystallises,” the review says.

The Review also says that the BOE must maintain its capacity to
respond to unforeseen shocks to the financial sector.

“It will be important for the Bank to maintain its strengthened
capacity to scan the horizon for impending financial stresses even when
financial conditions return to relative calm. It will be a challenge not
to allow the functions within the Bank that have been built up as a
response to the crisis to deteriorate when the immediate need for them
is less intense,” the Review says.

“Some shocks, such as the impact of rogue traders, or events like
9/11, are, by their nature, inherently unforeseeable. The Bank needs to
maintain its capacity to manage the consequences of unforeseen, as well
as foreseeable, events,” it says.

The report acknowledged that the BOE’s role as lender of last
resort had been fundamentally transformed since 2008 and noted that a
large part of what in the past was termed ELA has now been
institutionalised in facilities within the BOE’s published framework,
notably the Discount Window Facility.

The report also noted that in circumstances in which the Bank does
not consider ELA to be the appropriate response, the authorities now
have the means, through the Special Resolution Regime, to resolve a bank
in an orderly manner, so there is now a much reduced space in which ELA
might need to be contemplated.

The report noted, however, that the ELA it could be required to
come to the aid of non-bank institutions.

“It will be important for the Bank to have the capacity, if
necessary, to extend ELA to non-banks if strains on one or more were to
precipitate a threat to systemic stability,” the report says.

In its high level response to the report, the BOE said that it saw
no legal block to extending the ELA to non-banks.

“There is in fact no legal impediment to the Bank providing ELA to
non-banks. We will weigh carefully whether or not to go further and to
give some non-bank entities access to the Banks regular facilities,”
the BOE said.

The Review recommends that the BOE should maintain its currency
swap lines with overseas central banks in case of need.

The report also recommends that the BOE should seek an indemnity
from the Treasury (HMT) to cover the full amount of any ELA.

“Since ELA operations require authorisation by the Chancellor, it
would in principle be logical for the Bank to seek an indemnity from HMT
for the full amount of ELA from the outset of any operation,” it says.

From October 1, 2008 the BOE provided ELA to HBOS and from 7
October also provided ELA to RBS. The RBS facility was repaid by 16
December 2008, and the HBOS facility by January 16, 2009, showing the
BOE had met the test of being able to exit from the ELA support.

Use of the facilities peaked at Stg36.6 billion for RBS and at
Stg25.4 billion for HBOS.

–London bureau: +4420 7862 7492; email: wwilkes@marketnews.com

[TOPICS: M$$BE$]