BOE eyes liquidity scheme for all seasons

By Jane Wardell  |   2008-6-11  |     NEWSPAPER EDITION

BANK of England Governor Mervyn King said yesterday the central bank plans a standing liquidity facility as part of a framework for international stability designed to avoid repeats of the current global credit squeeze.

King said that emergency short-term lending by central banks, such as the coordinated action by the BOE and its counterparts in Europe and the United States in December, can be useful but that a "more continuously available facility may sometimes be needed to avoid an immediate loss of confidence."

"We intend ... to put in place a liquidity facility that works in all seasons both 'normal' and 'stressed,'" King said at the British Bankers' Association annual conference in London.

King said a long-running scheme would need to strike the right balance between offering enough support to avoid a major shock to the system and inadvertently encouraging risk-taking.

"It will need the right pricing structure, and it will need to overcome the 'stigma' problem that has affected access to all central banks during the current crisis," he said.

King said the correct pricing structure is needed to prevent future risk taking.

The liquidity facility will be part of so-called "Red Book" reforms that the bank intends to announce later this year.

King noted that the global economy is "passing through the most prolonged period of financial turbulence that most of us can remember."

However, he stopped short of a recent assessment by the International Monetary Fund that the current downturn is the worst since the 1930s, saying it was "too early to judge."

"After all, the crisis isn't yet over," he said.

King noted that financial crises have been a "regular and disturbing" feature of markets since the 18th century.

The IMF has said global losses could near US$1 trillion over the next two years.