The Bank of England (BoE) reiterated last week that it had no cap on the size of its special liquidity scheme, but said that it will not speculate on how much lending there will be.

The new special liquidity scheme was introduced at the beginning of May as a measure allowing banks to temporarily swap their high-quality, triple-A-rated MBS and other securities for U.K. Treasury bills.

U.K. banks are preparing to swap between GBP80 billion ($125 billion) and GBP90 billion of MBS assets for Treasury bills with the BoE - or 15% of U.K. banks' 2008 wholesale funding needs - the Financial Times reported earlier this month.

The BoE initially said that the likely uptake would be closer to GBP50 billion and added that U.K. banks had agreed to keep a minimum amount of assets in its special liquidity scheme, which will be in operation for three years.

However, the BoE said it does not intend to disclose how much it tapped through the facility until the drawdown period expires. This is because of fears that this could drive unwarranted market speculation on the health of the banking system and the institutions using the scheme.

Interest Trumps Concerns

Despite these reservations, published reports indicate that there has been a good amount of market interest in the facility and that having this funding source has helped ease credit concerns.

Deutsche Bank reported that many lenders are expected to structure and retain mortgage securitizations in the near term to make use of the BoE's special liquidity facility. This has been the case throughout Europe, where retained deals for the purpose of the European Central Bank repo facility have heavily dominated the pipeline since the start of the year.

Alliance & Leicester recently completed a number of "medium-term strategic funding" transactions using the collateral held in its Bracken and Langton RMBS vehicles, which analysts at Deutsche Bank said is possibly tied to a BoE-related financing facility.

"Aside from retained securitizations targeted at the Bank of England's special liquidity facility, there appears very little to suggest that there will be any public deal flow from U.K. banks in the near term," Deutsche Bank said. "U.K. bank ratings also remain under some pressure, which may have implications ultimately for the respective mortgage master trusts given rating thresholds for trust replenishments, swaps, GICs, etc."

U.K. banks will continue to have access to the BoE's normal liquidity operation, which has been stepped up since the credit crisis began.

Last week, the BoE announced details of its new long-term repo operation that will be held on May 20. The total size of the operation is expected to be GBP2.95 billion.

The bank said it intends to maintain its expanded three-month long-term repo open market operations against a wider range of collateral in its scheduled operations on June 17 and July 15, although the size of these operations would be cut back to GBP5 billion once the special liquidity scheme is used more regularly.

In related news, Northern Rock last week reported that its BoE loan facility had been reduced to GBP24.1 billion from GBP26.9 billion.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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