Bank to launch discount window facility on Monday

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - The Bank of England will launch on Monday a permanent successor to its Special Liquidity Scheme introduced to ease the credit crunch, in a major reform of the way it keeps money flowing through the financial system.

The central bank said on Thursday it would create two new facilities for banks to access funds depending on what it is needed for and that should remove the stigma that has come to be attached to using its present emergency lending facility.

Firstly, there will be a new overnight operational standing facility from October 20 where banks short of funds for technical reasons, such as a payments glitch, can borrow funds 25 basis points above the Bank's main lending rate, down from 100 basis points before.

The Bank will also create a 30-day discount window facility for banks with a more fundamental need for funds. The charge for this would start at 50 basis points and rise depending on quality of the collateral declined and usage of the facility.

"These arrangements set out our liquidity provisions in a systematic way to help banks plan their access to central bank liquidity, and so add certainty," Bank Governor Mervyn King told reporters.

The Bank only reformed its money market operations two years but the credit crisis that started last year has forced central banks around the world to innovate how they provide funds to cash-starved banks who are afraid to lend to each other.

The Bank created a temporary Special Liquidity Scheme in April that allows banks to exchange their illiquid assets for safe government debt.

It was due to expire this month but has been extended to the end of January and will run in tandem to the new discount window facility, though the SLS provides funds for up to three years and is limited to accepting legacy assets.