Economics

Bank of England is the United Kingdoms central bank. It is responsible for stabilizing prices and ensuring that there is confidence in its currency. This is called the monetary stability which is one of the banks core mandates. Its operations are mainly based on decisions made by the monetary policy committee. Standing facility is one of the indirect instruments used under the monetary policy to control the price and the money available for its own liabilities. Standing facilities are available for borrowing or deposits at banks own initiative as per the set limits of the central bank, lending by the central bank is always secured httpwww.bankofengland.co.ukmarketsmoneyosfindex.htm

Standing facility enables eligible banks and other building societies to access unlimited amount of money as borrowings and charged a penalty interest rate of 100 basis points above the base rate of 5.75. When there is instability in credit market, banks are not willing to lend to one another. This may arise as a result of increase in the lending rates. In such a case the central bank may pump into financial system money that will make lending conditions favorable httppapers.ssrn.comsol3papers.cfmabstract_id700164httppapers.ssrn.comsol3papers.cfmabstract_id700164

Standing facility is used by the central bank to control the targeted market rates by manipulating it. Its planned in a way that enables the financial institutions to lend money to one another in an overnight within the predetermined limit of the rates targeted by the central bank which minimizes the instability of the overnights interest rates. If the facility is not planned well, it will reduce the banks ability to be involved actively in interbanks market. Therefore, considering the conditions of the interbanks market, the facility may be utilized by the banks beyond the expectations of the central bank since the credit service is available (OBrien and Presley 2007, pp. 52). On the other hand, banks may undergo some disgrace in utilizing such facilities and may borrow smaller amounts than what is expected hence the effectiveness of the facility declines despites the interest rates instability (Noia and Micossi 2009, pp. 121).

Standing facilities are instruments that are offered by a bank for funding purposes, characterized by its use through the initiative of individual banks which determine the amounts used. Bank of England limits free access to standing facilities through charging interest rates, it also carries preannounce rates which are lowered due to growing use of the machines which give short term loans against collateral and at times it act as deposit facilities giving banks an opportunity to give surplus to the central bank as maintained by Buiter (2008). The interest on these deposits is below the rates in the markets but there is limited access to it. Interest rates applied are lower than the market prices for the first quantitative limits while deposits exceeding this are charged at a rate below the market prices.

Standing facilities are model tools used to manage monetary policy in the bank. They are referred to as repurchase transactions in domestic transactions or repos which include loans backed by domestic assets or foreign repurchase transactions, which are backed by foreign currency. An operation on the facilities differs on important points. They are conducted through banks initiative and in a competitive way (Artis and Lewis 2008, pp.31). The central bank deals with any bank on the grounds of public offer or market conditions at the time. Interest rates are modified for each individual operation. Operations with these instruments differ from open market sales and purchases they take place for cash in the market hence directly affects interest rates in the markets (Bindseil 2004, pp. 87).

When liquidity is required, the Bank of England as maintained by Allen (2009) will carry out a late-afternoon repo normally for an overnight at a rate above the existing repo rate at 100 basis points. The other option that can be used is allowing a late lending facility which enables banks to be cleared after closing the markets. The repo rate applicable for the late lending facility is between the predetermined rate and 150 basis points above the repo rate, dictated by the prevailing market conditions.

Standing facilities in the bank of England take the shape of purchase and resale transactions (repos) where the central bank purchases assets on a contract giving their resale at a given price on a future date and are used to deliver reserves (Cobham 2006, pp. 201). The use of the term sale and repurchase transactions refers to sale of assets by Bank of England on a contract which provide for there repurchase at a given price on a future date hence absorb liquidity. The seller repurchases the asset at the price that he sold and pays original buyer interest on implicit loan on the date of buying back (Russell and Heathfield 2008, pp. 134).

The bank of England and the Euro area central bank, utilizes the same monetary facilities. The frequency of the repos operations for EU is on weekly basis just like the BOE.  Whereas the operational target of BOE is of fixed rate repos, the EU has a minimum bid rate on its weekly repos. The two central systems provide the borrowing and deposits at penalty level. The reserve requirement for EU is at 2 of deposits and that of debt securities with their maturities is up to two years. The reserve ratio of BOE is at the banks discretion but limited to a certain predetermined maximum. BOE has a small number of those eligible to access the facility while the EU has a wider list. There should be extension of eligible counterparties in standing lending and its repo operations to include deposit taking institution by the BOE.