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Willy Weasel

Why Hasn't The Bank Of England Had To Intervene?

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Apparently there is some difference in our banking system which has meant the BoE hasn't had to intervene. Would someone who understands the UK banking system please explain what this is?

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They use a different system, where unlimited loans are already available at a high IR (IIRC, 1% above base). My guess is that even UK based FIs will borrow money off the ECB at lower rates.

Ingenius

Promote EUR carry trade, props up the pound while deflating the Euro

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Apparently there is some difference in our banking system which has meant the BoE hasn't had to intervene. Would someone who understands the UK banking system please explain what this is?

The Bank of England operates a more flexible reserve scheme, and a two-way "standing facility" that allows commercial banks to borrow and/or deposit money with the Bank on an overnight basis. The BoE relies heavily on these mechanisms to control Sterling flows between the banking system and the central bank, in contrast to the Fed which is mostly reliant on Open Market Operations to manage liquidity. It prefers to talk to the banks and get them to alter their reserves targets, and possibly loosen its own criteria for remuneration of central bank reserve balances, rather than pump in lots of money by buying bonds on an ad hoc basis.

In reality I think it's more the fact that this all goes on behind closed doors, rather than the particular merits of this monetary framework, that have so far avoided a real crisis of liquidity in the UK banking sector. Much as people (including me) like to knock it, in the grand scheme of things the Bank of England is one of the more competent central banks around.

Edit to add: These standing facilities basically form a "corridor" around the targeted base rate. Say the base rate is 6%. In this case the Bank will pay 6% interest on the commercial banks' deposit balances, provided they are within the target ranges that have been pre-agreed. If a bank finds itself short at the end of the day, it can borrow at the penalty rate of 7%. Obviously it will only do this if it cannot borrow in the open market at a better rate. Conversely, if a bank finds itself with surplus reserves, it can deposit it with the Bank at the penalty rate of 5% - but it will only do that if it cannot lend into the open market at a better rate.

This corridor system has the effect of bidding the market interest rate towards the Bank's target base rate. Any difference between the LIBOR and the base rate is usually due to the market's credit risk premium - basically the fact that commercial banks aren't quite[/] so reliable as the Bank of England when it comes to defaulting on their loans, and the BoE's reverse-repo lending facilities have quite stringent requirements on what collateral is accepted for them (whereas bank-to-bank lending may be secured on lower-grade collateral, or even be completely unsecured).

The significance of all this is that the market interest rate is much more likely to stay close to the BoE's target, which keeps the money market stable - all they have to do is supply enough funds to clear it at the rate they've chosen.

Edited by benj

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They use a different system, where unlimited loans are already available at a high IR (IIRC, 1% above base). My guess is that even UK based FIs will borrow money off the ECB at lower rates.

Thanks - makes you wonder why other central banks don't do this

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And thats my award for the best avatar, top quality :lol:

The Bank of England operates a more flexible reserve scheme, and a two-way "standing facility" that allows commercial banks to borrow and/or deposit money with the Bank on an overnight basis. The BoE relies heavily on these mechanisms to control Sterling flows between the banking system and the central bank, in contrast to the Fed which is mostly reliant on Open Market Operations to manage liquidity. It prefers to talk to the banks and get them to alter their reserves targets, and possibly loosen its own criteria for remuneration of central bank reserve balances, rather than pump in lots of money by buying bonds on an ad hoc basis.

In reality I think it's more the fact that this all goes on behind closed doors, rather than the particular merits of this monetary framework, that have so far avoided a real crisis of liquidity in the UK banking sector. Much as people (including me) like to knock it, in the grand scheme of things the Bank of England is one of the more competent central banks around.

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Stiff upper lips, moustaches, tweed and tea.

Bowler hot and walking stick= BOE, respected and trusted around the world.

3c05260t.gif

Cowboy boots and buckles = FED, hilly billy banking.

cow-boy.gif

Edited by Jimmy2Times

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Guest Bart of Darkness

Why Hasn't The Bank Of England Had To Intervene?, It seems to be the only major central bank to sit tight

That's "vigilance" for you.

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Stiff upper lips, moustaches, tweed and tea.

i couldn't agree more, tea is key.

people, next time you have a cuppa, don't just drink it for the sake of it..... think about what it stands for.

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