Wednesday, April 30, 2008
BOE is no Fed
"A sweeping plan unveiled by the Bank of England [BOE] to swap government bonds for banks' hard-to-sell securities comes at a steep price for banks. ... But, banks will have to accept a significant discount in the value of securities they exchange. The [BOE] will be the arbiter of the swap valuations. On Monday, it said that for every L100 of triple-A rated U.K. residential mortgage-backed securities offered as collateral by a bank, that bank would receive L70 to L90 of treasury bills. ... But the central bank had to publicize when the overnight window was tapped, which 'led to the great bank hunt,' Mr. [Mervyn] King said, to learn the identity of banks seeking funds. To avoid that hunt, the central bank won't disclose the amounts being swapped by banks through its new program until the borrowing window closes in six months. ... The [BOE's] new program has overtones of the [Fed's] recent initiative to swap government debt for hard-to-sell securities in the U.S.", WSJ, 22 April 2008.
The BOE's program is better than the Fed's in "buying" bank paper for 70-90% of par instead of the Fed's "buying" Bear Stearns' paper for 97% of par, $29 billion for $30 billion. The Fed's and the BOE's programs both try to maintain bank secrecy. I expect Britain's Financial Services Authority will do as much to force disclosure of these borrowings as Chris Cox's SEC, nothing.