The Bank of England proposed the extension to the pool of eligible collateral in the in its discount window facility to include portfolios of loans.
The discount window facility allows eligible banks and building societies to borrow gilts against a wide range of collateral. It is intended for counterparties that need temporary access to liquidity, but not as a source of long term funding.
“These proposals are designed to further enhance the Bank’s facilities for providing short-term liquidity insurance to counterparties, thereby underpinning confidence in the financial system, and to help the Bank manage the collateral it holds more efficiently through greater transparency,” said Paul Fisher, executive director for markets at the bank.
Counterparties are currently able temporarily to exchange securitizations of loans they have originated themselves for gilts in the discount window facility.
By extending eligibility to raw loans, the bank is looking to ensure that in stressed circumstances the main assets of most commercial banks would be eligible for use as collateral in the discount window facility without the need for securitization.
The bank would apply the same rigorous standards for eligibility and risk management as for other collateral in the discount window facility. Counterparties would need to pre-position loan portfolios, which would be subject to regular review.
The bank also is looking to amend its eligibility criteria to require enhanced disclosure of information relating to these securities to improve the efficiency of the bank’s risk management of ABS and covered bonds.
One of the bank’s guiding principles for its market operations is that it must be able to manage risk and value the collateral accepted. The bank has therefore been giving consideration to the information that it requires from issuers of ABS.
The proposed revisions would require counterparties to make publicly available granular information in the form of loan-level data for most asset classes and standardized summary tables in investor reports; as well as key legal documents, summaries of structural features and models for each transaction.
The public disclosure of such information – not just on a bilateral basis with the bank – should create greater transparency across the market. The consultation proposes that the bank would begin to adopt these requirements in 2011.