The Bank of England (BofE) is looking less likely to extend the terms of its special liquidity scheme (SLS), which is due to end on Oct. 21.

The bank reiterated that the program was always meant to be a short-term solution. However, the BofE still intends to unveil plans for liquidity access beyond the October deadline.

Mervyn King, governor of the BofE, in his address to the Treasury committee last week, reiterated that the SLS was only ever intended to be temporary measure, and the window for placing assets into the scheme will close as planned.

"The [new] special liquidity scheme will be a one-off scheme to provide insurance and liquidity to banks which face a short term problem," King said. "SLS is not and cannot be an alternative source of funding to finance investment. The facility will give the banking system a window of three years to sort out their financial shortages."

But with the wholesale funding markets closed, the SLS has provided a much-needed lifeline for banks. According to market analysts, U.K. banks have borrowed approximately £200 billion ($352 billion) under the scheme that was launched in April. Now players have urged the Bank for a more permanent solution that could help resolve market uncertainty.

Over the past months, the British Bankers' Association and the Council of Mortgage Lenders have called for the renewal or extension of the SLS, and urged the BofE to unveil plans for any other measures it will implement to help restore market confidence.

King said the BofE is still planning for a permanent liquidity insurance facility and will publish a consultation paper by the end of this week. The BofE will also unveil in this paper its plans for continued access to liquidity insurance from the Bank of England past the Oct. 21 deadline. The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks.

"The facility will be an important part of the contribution which the Bank can make to enhance the stability of the banking system," said King. "But it is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system, indeed it cannot do that."

Only private savers or taxpayers through the government can provide such funds, King added. He hopes that everyone will understand that these proposals, important as they are, will not and cannot solve the funding shortage and finance bank lending, including mortgage lending.

The new plan is expected to run separately from any government measures introduced as part of the HM Treasury review of the mortgage finance market. The Treasury review is being led by Sir James Crosby. Its release is expected later this month.

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

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