Sir Mervyn King announced last week that the Extended Collateral Term Repo (ECTR) Facility would be activated to counter “market-wide stress of an exceptional nature”.
All successful bidders will pay interest daily at the Bank rate of 0.5 per cent plus a minimum of 25 basis points.
Loans starting at £5m were allocated among firms according to willingness to pay, with those bidding the highest spreads above the bank rate receiving funds first.
The Bank accepted “the widest variety of collateral” in return, including illiquid assets unacceptable in existing Indexed Long-Term Repo (ILTR) operations, such as student and consumer loans, mortgage-backed securities and securitised credit card debt.
The scheme was last week made significantly more generous than first planned, by increasing the term of the loans from 30 days to six months and decreasing the minimum bid from a 125 basis point spread over the Bank rate.
The change was announced in chancellor George Osborne’s Mansion House speech.
RBS economist and former central bank official Richard Barwell said “the key goal of the ECTR was proving that the facility can be used” and called today’s auction “mission accomplished”.
However he warned that if ECTR becomes more than an emergency “safety net”, banks that are “addicted to official support” will shift their balance sheets in dangerous directions.