Bank of England Allots 5 Billion Pounds in New ECTR Auction

The Bank of England said it alloted the full amount offered in the first of its new sterling liquidity auctions.

The central bank in London alloted 5 billion pounds ($7.9 billion) at a clearing spread of 25 basis points above its benchmark rate, currently at 0.5 percent. It didn’t provide any further details of the auction.

Bank of England Governor Mervyn King said last week the auction facility would be activated, along with a new plan to stoke bank lending in the U.K., to counter a “black cloud” from Europe. Minutes of this month’s monetary-policy decision showed he was outvoted in a bid to increase bond purchases as a majority of the Monetary Policy Committee voted for no change.

“The key on the ECTR was proving that the facility can be used, so, mission accomplished,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London and a former central bank official. “Banks can get funds at a cheap price if they need it in a crisis. Job done.”

The sterling Libor-OIS spread, a gauge of banks’ reluctance to lend, fell to 49.2 basis points today from 54.1 basis points yesterday, according to the British Bankers’ Association. The spread has fallen from 60.4 basis points on Jan. 10.

Liquidity Pool

Paul Fisher, markets director at the central bank, said in March enough collateral had been pre-assessed to create a “substantial” pool of liquidity ready to lend to institutions through its discount window. The pool of securities had reached 265 billion pounds, he said in a March 29 speech, giving the bank scope to lend about 160 billion pounds without having to conduct further “detailed collateral checks.”

The Extended Collateral Term Repo operation was announced in December to address potential market strains and mitigate risks to financial stability stemming from a liquidity shortage. The facility, introduced at a time when the central bank considered the supply of liquidity was adequate, lends against the widest range of collateral to ensure that banks have access to enough sterling to meet unexpected shocks.

The auction “doesn’t signal large stresses in the banking system -- if the spread had been bigger it would have been a sign they were more desperate” for liquidity, said Jens Larsen, chief European economist at RBC Capital Markets in London and a former central bank official. “They haven’t given us much information so the signal from this is limited.”

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