BOE Takes 287 Billion Pounds in Liquidity Collateral

By Brian Swint

Feb. 3 (Bloomberg) -- The Bank of England said it accepted collateral with a nominal value of 287 billion pounds ($409 billion) in its emergency lending program for institutions stung by the global financial crisis.

The bank values the securities at 242 billion pounds, a discount of 16 percent as of Jan. 30, when the application deadline expired. It loaned 185 billion pounds in Treasury bills against the collateral, according to a statement by the central bank in London today.

Former U.K. policy Willem Buiter said today that there are still “a lot of dead banks walking” facing losses from the crisis and the global economic slump. The data show how demand soared for liquid funds from the Bank of England, which predicted institutions would seek help worth about 50 billion pounds when it unveiled the swap program last April.

“Just about everybody has had a go at it,” said David Tinsley, an economist at National Australia Bank and a former Bank of England official. “It underlines the need that there has been for a lot of liquidity.”

The bank’s program, known as the Special Liquidity Scheme, was cited by the government as part of a 500 billion-pound rescue package for British banks.

Most collateral was residential mortgage-backed securities or mortgage-covered bonds, and 32 institutions accounting for 80 percent of the balance sheet of those banks that were eligible took part in the program, the statement said.

Fed Facility

The U.S. Federal Reserve’s Term Securities Lending Facility, or TSLF, was started in March, a month before the U.K. program, and the Fed said it would auction as much as $200 billion in Treasuries against mortgage-backed debt and other securities. The Fed has yet to disclose how much collateral it has taken onto its books.

Under the British plan, the Bank of England will hold the collateral for up to three years. The swap was limited to securities issued before 2008 and the drawdown period expired last month after being extended in September when Lehman Brothers Holdings Inc. filed for bankruptcy.

Government rescues in the U.S. and Europe won’t be enough to stop more banks from becoming insolvent, Buiter said.

“There is still a lot more to come from the banking sector in the U.K., Europe and the U.S.,” Buiter said at a conference in London. “There are still a lot of dead banks walking who haven’t owned up yet. For the rest of this year we will have more uncovering of financial instability.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net