Hi °C | Lo °C A Bank of England policymaker has insisted a £185bn funding lifeline for Britain's banks will not be extended or replaced when it comes to an end in 2012.
Paul Fisher, executive director of markets and member of the rate-setting Monetary Policy Committee (MPC), said banks will have to stand on their own feet after the Special Liquidity Scheme (SLS) is withdrawn.
The SLS has been a vital source of funding for banks after wholesale markets froze during the credit crunch.
It was introduced to provide emergency cash to the banking system in early 2008, allowing groups to swap high quality mortgage assets for more easily tradable Treasury bills.
In a speech to investors in London, Mr Fisher said: "After three years of large-scale liquidity support the Bank expects each institution to be in a position to fund itself through normal market mechanisms.
"Suppose the scheme were to be rolled on indefinitely. What was intended and designed as system-wide central bank liquidity support would become instead a fiscal operation.
"We would be using Government debt - and hence public money - to subsidise a group of private sector firms, with the public purse being at risk."
Bank Governor Mervyn King sent out a clear message to banks earlier this year that the SLS would not be extended, saying in February that it had been "more than enough" and was one of the most generous in the world.
However there are fears the removal of the SLS will leave lenders with a funding shortfall at a time when they are being called on to support the economy.
It is thought the UK's largest banks will need to refinance or replace up to £800bn in loans and assets by the end of 2012.
This comes against a backdrop of increasing regulatory burden on banks, such as the Basel III capital rules that have led to warnings over increased funding costs.
