Explainer: Special liquidity scheme
Friday, September 12, 2008
The market seizure caused by the near-collapse of Bear Stearns, America's fifth-largest investment bank, forced Bank of England governor Mervyn King to announce the special liquidity scheme on April 21.
It was intended to encourage banks and building societies to lend to each other, which they had been reluctant to do as a result of the run on Northern Rock a year ago. The problem was that big financial groups had lost their ability to raise funds by packaging up mortgages into bonds.
These became toxic in the US sub-prime mortgage crisis that started last summer and forced Northern Rock to its knees.
Through the SLS, banks and building societies were able to swap mortgage-backed bonds and other unwanted assets for attractive government paper (nine-month Treasury bills). The idea was to inject more liquidity into financial markets and encourage banks to do business with each other.
Read the full article at Guardian property news
It was intended to encourage banks and building societies to lend to each other, which they had been reluctant to do as a result of the run on Northern Rock a year ago. The problem was that big financial groups had lost their ability to raise funds by packaging up mortgages into bonds.
These became toxic in the US sub-prime mortgage crisis that started last summer and forced Northern Rock to its knees.
Through the SLS, banks and building societies were able to swap mortgage-backed bonds and other unwanted assets for attractive government paper (nine-month Treasury bills). The idea was to inject more liquidity into financial markets and encourage banks to do business with each other.
Read the full article at Guardian property news
Labels: Bank of England, bear sterns, Mervyn King, northern rock, US sub prime mortgage crisis
