Bank of England hopes discount window plan will end 'witch hunts'

The Bank of England is to radically revise its operations in the money markets, after a year of unprecedented pressure, trauma and hundreds of billions of pounds being lent to distressed financial institutions. It hopes to end the "witch hunt" of banks that may have borrowed from it.

A new discount window will be introduced to provide the banks with money for up to a month, and there are to be new overnight "standing" facilities. Both reforms will be implemented on Monday.

Related articles

• Labour 'broke' the economy, says Cameron
• Today in Politics: Cameron ends the truce
• James Daley: A volatile time for our pensions – but this is not the time to panic
• London shares climbing again
• French bank loses €600m in 'market incident'
• Dominic Lawson: Great pension divide: which side are you on?
• Sean O'Grady: Japan's roads to nowhere and the danger of deflation
• Steve Richards: A hard lesson for the Tories to learn
• Q&A: What to do if you're struggling to pay your mortgage
• Brown: Petrol firms must lower fuel prices or face OFT inquiry
• European states plead poverty as credit crisis threatens 'son of Kyoto' agreement
• Opec calls emergency summit as oil price halves
• Loophole in minister's new emissions target
• Councils in Iceland crash will lose £60m interest
• Leading article: No time for retreat
• European markets tumble as confidence collapses
• Is Switzerland the next Iceland?
• Jeremy Warner's Outlook: Governments must be bolder to prevent economic calamity
• New multibillion-dollar writedowns for Merrill Lynch and Citigroup
• Morgan Stanley chief braves interview to reassure investors
• Travis Perkins profits warning sends DIY stocks sliding
• Hedge funds feel the credit crunch pain
• Borders' Icelandic debts force refinancing as key Christmas period approaches
• Market Report: Prudential pummelled by capital worries
• Investment Column: Stock up on Britvic for promise of some fizz
• Credit crisis diary: If only Hornby could turn back time
• Letters: A close brush with chaos
• Call to curb 'aggressive' Rock over repossessions
• Search the news archive for more stories

A new system of "repo auctions", whereby the commercial banks bid for Bank facilities using different types of collateral and at different interest rates, will also be brought in, but after a longer period of consultation.

The aim, said the Bank's Governor Mervyn King, is to "set out our liquidity provisions in a systematic way to help banks plan access to central bank liquidity and so add certainty".

The Bank also wishes to ensure that its loans to banks "avoid encouraging imprudent liquidity management".

The "discount window facility" will give the banks the ability to borrow government securities against a wide range of collateral, including new mortgage-backed securities and their own loan books. Fees for use of the facility will reflect the type of collateral and the size of the drawing – banks that borrow larger amounts and use lower quality collateral will pay more, on a sliding scale of fees.

In recognition of the fact that most users of its standing overnight facilities will be doing so purely to bridge very short term issues with their payments systems, the Bank will be reducing the cost for them of doing so. The Discount Window is designed to deal with more serious stresses, and is priced accordingly.

One significant change is the elimination of the stigma that occurred in the credit crisis when it became known that certain banks had borrowed from the Bank of England, even for innocuous reasons such as a late payment. The daily reporting of amounts borrowed sometimes became the starting point for a witch hunt if the amounts were suspiciously large, a process many "innocent" banks found destabilising.

The Bank of England will now disclose the scale of its lending activities much less often, and on an average basis. That would make it much more difficult to identify individual users. The scale of the Bank's Special Liquidity Scheme, introduced in April, has never formally been revealed.

The new arrangements will operate alongside the Special Liquidity Scheme until the SLS window closes in January. The SLS's assets swaps of gilts for unmarketable mortgage-backed securities can be rolled over for up to three years, and that will not be repeated under the new rules.