Banks well placed to cope with end of SLS
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Banks are well equipped to raise funding once the Special Liquidity Scheme starts to wind down this year, says Paul Fisher, executive director of markets at the Bank of England.
The Bank introduced the SLS in April 2008, which involved lenders swapping £185bn of treasury bills in exchange for high quality but temporarily illiquid private sector collateral.
The scheme will start to wind down this year and is due to be closed in January 2012, which means lenders will need to make sure they have bought back their assets.
But Fisher says the banks have made good early progress in reducing their use of the scheme and unwinding the collateral swaps ahead of their contractual maturities.
He says: “Much of the collateral posted under SLS was RMBS and residential mortgage-backed covered bonds, where conditions in the secondary and repo markets have improved since the financial market seizure beginning in 2007.”
Fisher believes banks will be able to generate liquidity using their mortgage assets in the private market or by raising funding through other markets.
He says the private sector has recently engaged in SLS-like transactions and pension funds have been agreeing to swap highly liquid gilts for less liquid RMBS.
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