Oct. 16 (Bloomberg) -- The Bank of England will make it easier for financial institutions to borrow emergency funds, joining other central banks in taking steps to tackle dysfunctional markets.

The bank will unveil a discount facility window on Oct. 20 allowing banks to swap collateral including illiquid corporate securities for U.K. government bonds, it said today in London. The central bank will also reduce the penalty rate for institutions seeking overnight funds and curb disclosure rules to eliminate the stigma associated with seeking such help.

``The arrangements set out our liquidity provision in a systematic way to help banks plan their access to central bank liquidity, and so add certainty,'' Governor Mervyn King said in a statement to journalists.

King has been criticized by some investors and former policy makers for not moving fast enough in response to the 14-month long credit crisis. Banks have shunned its emergency overnight lending facility ever since a witch hunt last year forced Barclays Plc to deny having liquidity problems after using it.

The Bank of England brought forward the revamp of its operations on Oct. 8 and cut the benchmark interest rate by the most since 2001 in a global battle to stem the financial crisis.

``It's certainly more relaxed from where they were,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. ``It appears to be trying to set out a flexible enough system going forward that should be able to deal with glitches and more fundamentally help financial institutions deal with market stress.''

Penalty Rate

The Bank of England's new standing facility, which allows banks to borrow from the central bank overnight, will carry a penalty rate of 25 basis points, down from the previous standard of 100 basis points. A record of each month's average borrowing from the facility will be published the following month, a change from the current policy of releasing details of the borrowing on a daily basis.

The standing facility is designed to deal with ``technical payments frictions'' and help enforce monetary policy, the central bank said in a briefing paper.

The Bank of England has moved in the past year to loosen its market rules, extending the terms of lending and accepting a broader range of collateral. Some investors such as Standard Life Investments Ltd. Chief Executive Officer Keith Skeoch nevertheless have argued that these moves didn't come fast enough to help banks such as HBOS Plc.

ECB Collateral

The European Central Bank and the Federal Reserve by contrast have taken steps such as buying commercial paper and cutting the rating on the collateral it accepts in market operations to BBB-.

The Bank of England says that today's moves aim to set up a permanent system that will work in times of market stress as well as more regular conditions. King in June promised a system ``for all seasons.''

The discount window will allow banks to swap assets ranging from government securities to debt that banks have generated themselves for U.K. gilts, with penalties that vary according to the quality of those securities. This is designed ``to provide liquidity insurance in the event of stress,'' the bank said.

The bank said that publication of the discount window's operations will show average use on a quarterly basis, released at the end of the following quarter.

The bank will seek feedback on proposals to keep the target range for financial institutions' reserves at 5 percent during normal circumstances and to widen its collateral rules in long- term market operations.

`Modest Help'

``They are permanent facilities that should help money markets function normally under less stress,'' said Philip Shaw, chief economist at Investec Securities in London. ``They could be a modest help in relieving current market tensions but that's not their main aim. We're going to be more reliant on the government's credit guarantee scheme.''

The government last week unveiled a plan to buy as much as 50 billion pounds ($85 billion) in equity stakes in banks and provide 250 billion pounds in interbank loan guarantees. The cash injection is the biggest since the British government's nationalization wave by the socialist government of Clement Attlee after World War II.

The three-month London interbank offered rate, or Libor, for pounds stood at 6.18 percent today, down from a peak of 6.31 percent on Oct. 1. Policy makers lowered the benchmark interest rate to 4.5 percent on Oct. 8 from 5 percent in a coordinated move with the European Central Bank and the Fed.

Repair Work

Bank of England Executive Director for Markets Paul Tucker said in March that the ``social contract'' between central banks and financial institutions has broken down and that the stigma of using the central bank's facilities meant that ``this is a regime that needs to be repaired.''

Barclays borrowed as much as 1.6 billion pounds at a penalty rate in August 2007 from the central bank after a failure in the system that processes trades, a person with knowledge of the transaction said afterwards. The bank was forced to issue a statement that it was ``flush with liquidity.''

The Bank of England last revamped its money market operations in May 2006. At that time, the main goal was to ensure that the overnight borrowing rate between banks stayed close to the central bank benchmark.

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

Last Updated: October 16, 2008 07:14 EDT