Carney in pledge on cheap finance
Published 24/10/2013 | 18:11
Banks will be able to access cheap finance from the Bank of England even after current initiatives to stimulate lending have come to an end, under a new framework set out by governor Mark Carney.
Policymakers have put billions of pounds behind quantitative easing (QE) and Funding for Lending schemes designed to nurse the economy back to recovery and ease credit conditions during the downturn.
But in a speech tonight, Mr Carney has for the first time set out how the Bank will continue to offer support to the financial system as these are wound down over time.
The governor argued that tougher requirements on banks to hold assets mean Threadneedle Street can be less stringent about the use of its facilities.
In the speech in central London, marking the 125th anniversary of the Financial Times, Mr Carney said: "Five simple words describe our approach: we are open for business."
Mr Carney said the new framework meant the Bank of England was offering money for longer terms, the range of assets accepted in exchange would be wider and the use of facilities would be cheaper.
"Banks can be confident that, when they want to use our facilities, they will be allowed to access them.
"Because we are both the supervisor and the central bank, the strong presumption is now that, if a bank meets the supervisory threshold conditions to operate and has signed up to our framework, it will be able to use our facilities."
He said that at times of "actual or prospective stressed conditions" it stood ready to provide "cheap, plentiful money".
This did not excuse banks the need "to manage their balance sheets prudently", he said, but added: "More exacting liquidity requirements mean the conditions for using central banking facilities can be less stringent (and more effective)."
Mr Carney said: "In the markets of today, initial usage of these facilities is likely to be limited. The MPC (Monetary Policy Committee)'s stock of asset purchases (QE) and the Funding for Lending Scheme currently provide all the liquidity and collateral that the sterling system needs.
"But as these operations are wound down over time, we expect to see the banks making increasing use of our new permanent facilities."
The governor said the Bank would also consider further measures such as extending the use of its facilities to non-bank participants in the financial world as well as providing liquidity in currencies other than sterling.
Also in the speech, Mr Carney underlined the importance of solving the problem of banks that are too big to fail - requiring international engagement.
The governor said that fairness "demands the end of a system that privatises gains but socialises losses" - when taxpayers are forced to bail out financial institutions.
He said that by 2050, if UK banks' share of global activity remained the same and foreign economies progressed according to historical norms, the banks' assets could exceed nine times gross domestic product.
"Simple economics dictate that the UK state cannot stand behind a banking system that is already many times the size of the economy."