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New Star warns BoE liquidity scheme may be ineffective

The Bank of England’s special liquidity scheme may prove ineffective because of its unattractive fee structure, according to New Star.

The asset management company is warning that the scheme is similar to the term auctions of three-month funds last autumn, which attracted no bidders because the minimum bid rate was set at a penal level.

Chief economist and strategist Simon Ward says: “The fee payable on a swap of mortgage-backed securities for Treasury bills will be the spread between three-month LIBOR and the three-month gilt repo rate – currently about 100 basis points. A floor has been set at 20 basis points but is irrelevant. Banks will use Treasury bills to obtain funds in the market at the gilt repo rate. Their total cost of funding – including the fee – will therefore equal LIBOR.”

Ward says the scheme will help any institutions currently unable to access interbank funds at LIBOR but seems unlikely to result in a significant reduction in the current wide LIBOR-Bank rate spread.

He says: “There is a danger that use of the scheme will be interpreted as an admission of weakness. The major banks may have agreed to participate in the scheme regardless of their need for funds to mute this signalling effect.

“The relatively restrictive nature of the scheme suggests the LIBOR-Bank rate spread will remain elevated and the onus will be on the Bank’s Monetary Policy Committee to bring market rates down via further cuts in its Bank rate.”


Concern over Bright Grey’s online system

Insurance application outsourcing firm MorganAsh says it is worried over the quality of Bright Grey’s online application system after the provider admitted that large numbers of applicants are having to make material changes to their forms.

Miner to major

Last week was pretty bumpy in the market as we digested the news that the mighty General Electric had faltered in the profit stakes. Speaking, as I was, at a seminar in the Jockey Club after the FTSE 100 Index had had two days of 1 per cent plus swings – first down, then up – it was all too easy to draw racing analogies. But as we have seen on so many occasions recently, a downward spike brings out the bargainhunters. Wednesday last week almost felt like a bull market had returned.

Hard times

With property prices falling in some areas, you would think that there was an opportunity for struggling first-time buyers trying to get on the housing ladder. Unfortunately, while prices may become more affordable, the rapidly diminishing number of high loan to value mortgages means the majority of first-time buyers will not be able to take advantage of this situation.


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