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Additional Liquidity Operations from BofEn

14 June 2016 by

Today sees the first of three additional liquidity windows for UK banks and building societies. Indexed Long-Term Repo Operations as they are known here in the UK, usually take place on the first Tuesday of every month, but with the risk of Brexit looming the Central Bank has announced three additional Operations to ensure that ample liquidity is maintained throughout the UK banking system.

The additional dates are 14th June, 21st June, and 28th June, in addition to the standard 7th June operation of last week and the forthcoming facility on 5th July,  meaning that the banks will be offered 6 months ‘worth’ of unlimited liquidity (against a broad range of suitable collateral) over a period of five consecutive weeks around the UK referendum date.

Should more be required then the Bank of England can, at its will, introduce further dates still, or should it wish, introduce another form of long term liquidity operation.

Investors should be comforted by this, even if the UK votes to exit the EU, as running out of liquidity is one of the key risks to the financial system. Putting it simply, ultimately banks will only get into trouble if they have too little capital (usually from loan losses) or they run out of liquidity. The latter can happen very quickly as witnessed during the Credit Crisis. For this reason Mark Carney’s pre-emptive move to offer additional unlimited liquidity should be a big risk mitigant, even if it is not needed.

For those that wish to follow the additional Operation today (or any of the others) to see how much the lenders take down, the results can be found on the day on the “Latest Operational Announcements” section of the Bank of England’s website. However we are not expecting much of a take up, given how liquid the system already is and this Operation coming so soon after last week’s.

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