UK Treasury and the Bank of England launch a Covid Corporate Financing Facility (CCFF)

UK Treasury and the Bank are coordinating closely in order to ensure that our initiatives are complementary and that they will, collectively, have maximum impact, consistent with the Bank and HM Treasury’s independent responsibilities.

Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for working capital from companies.

The CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy.  It will help businesses across a range of sectors to pay wages and suppliers, even while experiencing severe disruption to cashflows.

The facility will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock, and will be open to firms that can demonstrate they were in sound financial health prior to the shock.  The facility will look through temporary impacts on firms’ balance sheets and cash flows by basing eligibility on firms’ credit ratings prior to the Covid-19 shock. Businesses do not need to have previously issued commercial paper in order to participate.

The scheme will operate for at least 12 months and for as long as steps are needed to relieve cash flow pressures on firms that make a material contribution to the UK economy.  The Bank will publish further details of the operation of the CCFF in a Market Notice on Wednesday 18 March. The Bank will implement the facility on behalf of the Treasury and will put it into place as soon as possible.

By providing an alternative source of finance for a wide range of companies, the scheme will help to preserve the capacity of the banking system to lend to other companies, including small and medium-sized enterprises, which rely on banks.  Last week, the Bank of England boosted this capacity by:

  • launching a new Term Funding Scheme with additional incentives for lending to SMEs (TFSME).  This will, over the next 12 months, offer four-year funding to banks of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate.  Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).
  • reducing the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers with immediate effect. This extended banks’ capacity to lend to businesses by up to £190bn.

Taken together the actions announced by HM Treasury and the Bank of England will help UK businesses and households to bridge a temporarily difficult period and thereby to mitigate any longer-lasting effects of Covid-19 on jobs, growth and the UK economy.

HM Treasury and the Bank will take all further necessary steps to support the UK economy and financial system, consistent with its statutory responsibilities.

DFA Updated Property And Finance Scenarios

We have updated our scenarios, driven from our core market models.

The drivers are rising unemployment, and business failure thanks to the impact of the virus. We discussed these scenarios in our live stream event last night. This is the full version with live chat. The show starts formally at 32 minutes.

We estimate that mortgage stress is set to rise significantly in the months ahead as household cash-flows are interrupted.

Alternatively we have also released a shorter edited version, without chat here:

Shock And Awe – The Property Imperative Daily 16 March 2020

Welcome to our latest post covering finance and property news with a distinctively Australian flavour. Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…

March Live Q&A:

RBA Says “More On Thursday”

As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses. (Refer to earlier Council of Financial Regulators’ (CFR) press release.) Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus. At the same time, trading liquidity has deteriorated in some markets.

In response, the Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system. The Bank will also be conducting one-month and three-month repo operations in its daily market operations until further notice to provide liquidity to Australian financial markets. In addition the Bank will conduct longer term repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant. The Reserve Bank and the AOFM are in close liaison in monitoring market conditions and supporting continued functioning of the market.

The Bank will announce further policy measures to support the Australian economy on Thursday.

DFA is expecting a 0.25% rate cut, and formal QE to go alongside the repo operations already in train.

Fed’s Firepower Pulls Bond Rates Lower; For Now

Understand that the Fed’s actions (and other central banks actually) are NOT about supporting stock prices – as they are determined more by prospective future cash flows from business operations than anything else. There is a lot of rubbish in the media on this point.

But bond rates are another matter. Given the hike in bond rates we saw last week – which translates to higher interest bills, and funding issues, the T10 and 3 Month US rates dropped after the announcement. T10 was down 24%

The 3 month dropped 50%.

Question is, will this be enough – we think not. Watch for more action to try to control rates.

Aussie bonds also came down, with the 10 year down 13% and the 2 year down 20%.

S&P 500 Futures Drops 5%; Hits Limit

Chair Jerome Powell’s announcement this morning has spooked the US markets, with the futures price falling 5% and activating a trading halt.

The raft of announcements, which we have already covered has scared the markets, and it suggest a weak opening in the US later.

There are severe cracks opening up in the financial system, with treasury pricing haywire, the Feds initial massive repo sale under-subscribed, and direct liquidity support ineffective. Of course they want to shore up the financial markets, and he was at pains in the press conference (telephone) to underscore how well capitalised the banks are, and that negative rates are not coming.

Worth also noting the FED slashed the Interest on Excess Reserves that it pays the banks for parking their cash at the Fed to 0.10% effective Monday. Back in the heady days of 2019, the Fed paid the banks $34 billion in interest on reserves. This income just went away.

US Bank shares are under pressure. Here in Australia the Financials Sector Index is down around 4%, but rising from opening lows.

ASX Falls On Opening

The market was 4% lower on opening today, despite the various actions from central banks and other regulatory agencies. We will see how things develop later as other markets open.

Jerome Powell Fed chair has been underscoring the resilience of the financial systems and the power of the tools available, though said the under-subscribed repo strategy they executed last week showed they needed to purchase securities direct but given the market reaction, they then needed to act aggressively to support liquidity beyond that. Hence the rate cut decision.