The governor of the Bank of England has pledged extra liquidity to the money markets in a bid to restore confidence.
Mervyn King made the pledge to MPs of the Treasury Select Committee this morning, as he discussed the central bank’s inflation report.
He says: ”I want to assure you that the bank will provide the liquidity assistance that the system needs in order to restore confidence. Such lending can be only a temporary measure but it can be a useful bridge to a longer-term solution.”
The Bank of England has extended the range of eligible collateral on its three-month loans in December, January and this month to include mortgage-backed securities.
King confirmed that the January auction will be rolled over on April 15, with the size of the auction to be decided in the light of market conditions at the time.
King says: “It is unrealistic to assume that markets for many asset-backed securities are likely to re-open speedily or, when they do, to their previous levels of activity.”
He warns that the financial crisis has moved into a new phase.
King says the heart of the problem stems from an overhang on banks’ balance sheets of assets in which markets have closed.
He adds: “These assets cannot now be sold or used to secure funding in the market – they are difficult to finance. That has created uncertainty about the strength of banks’ financial positions.”