Bank of England surprises City by extending Special Liquidity Scheme

The Bank of England has announced a surprise extension to its Special Liquidity Scheme.

Last week, the Governor, Mervyn King, told the Commons Treasury Select Committee that the scheme would end as planned on 21 October. But in a statement yesterday, the Bank said the "window" for the banks to come to the Bank to swap unmarketable mortgage-backed securities for gilts would be extended to 30 January, because of "the current disorderly market conditions" and "to provide additional time for banks to plan their access to the scheme in an orderly fashion".

The scheme is though to have taken anything from £80bn to £200bn of mortgage-backed securities from banks, which they can swap for gilts on a rolling basis for up to three years. The Bank has come under increasing pressure to ensure that "Son of SLS", a liquidity insurance plan, would be equally generous, something the Bank had been reluctant to do for fear that it could be dragged into funding the UK banks' lending activities.

Michael Saunders of Citi European Economics said decision was a sensible one. "Some certainty over the availability of further long-term financing may also have been a key condition in order for the rescue merger of HBOS to proceed."