Financial Regulatory Forum

Bank of England to launch commercial paper facility Aug. 3

By Reuters Staff
July 30, 2009

LONDON, July 30 (Reuters) – The Bank of England said on Thursday it would launch its Secured Commercial Paper Facility on Aug. 3 to improve the functioning of corporate credit markets.

It said the facility, which will buy high quality asset-backed commercial paper securities, would continue for as long as abnormal conditions in credit markets persisted.

It said purchases under the facility may be financed by advances from the Debt Management Office or, if the Monetary Policy Committee authorises it, the issuance of central bank reserves.

That means the BoE could incorporate purchases under the facility into its quantitative easing programme if it decides to extend it.

The BoE will decide next week whether or not to extend its 125 billion pound asset purchase target, focused on bond-buying, which aims to combat a shortage of cash caused by the credit crunch.

British authorities have identified a lack of finance for firms as one of the biggest threats to recovery and have put in place a number of schemes to makes funds more readily available.

Corporate credit conditions have eased in recent months, helped by a tightening of credit spreads and a recovery in equity markets but many small firms are still reporting difficulties.

“The purpose of the facility is to help improve the function of the private market by standing reading to make primary market purchases and by acting as a backstop for secondary market investors,” the BoE said.

Although the facility will launch next week, the BoE
noted that transactions would not take place until participants’ programmes had been approved as eligible.

Analysts were sceptical the scheme would have a huge impact on corporate financing costs but said it showed the central bank was still looking at ways to support the economy.

“It shows that the BoE remains committed to providing market support regardless of its monetary policy,” said Philip Shaw, chief economist at Investec.

“Whether it will be a big improvement remains a question. but we’ve seen the BoE do a number of small improvements that may add up to something bigger.”

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