Frozen liquidity

Peter Warburton’s call for the reintroduction of the Bank of England’s Special Liquidity Scheme [A wholesale improvement, 22 December] will not solve the problem.

This is because his argument does not look at the micro-issues affecting the macro. Simply put, the main problem is the FSA’s implemented liquidity requirements soak up a lot of liquidity, which is exacerbated by higher capital requirement rules. These requirements have been applied anti-cyclically and more than cancel out the credit flow impetus that would come from any Special Liquidity Scheme, unless this is unfeasibly large, in that the Bank of England would have to issue much more short-term liquidity than would be supported by good quality long-term assets deposited with it by banks making use of this facility.

Kumar Devadasan