As half the world worries about too much liquidity being created by the Fed’s latest round of quantitative easing, perhaps they’re misunderstanding the real threat — too little liquidity.
While the recent credit crunch has seemingly been completely forgotten, it was just a year and a half ago, and the world still has an enormous amount of upcoming liquidity needs:
According to the Bank of England’s last Financial Stability Report, there is approximately $5 trillion (£3 trillion) of refinancing to be done by major banks around the world over the next three years.
Banks in Greece, Portugal and Ireland again find markets for all but very short term funding effectively closed to them. What chance do UK banks have of raising the necessary amid such humongous global competition?
The largest single element in the UK funding shortfall is accounted for by the “Special Liquidity Scheme” (SLS), a facility set up by the Bank of England at the height of the financial crisis to provide mortgage lenders with the finance they were being denied by wholesale markets. Some £57bn of this money has since been repaid, but there was still £128bn of it outstanding at the last count
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