The fees payable under the Bank of England’s special liquidity scheme (SLS) imply the facility will be attractive only to banks currently either unable to borrow longer-term funds at LIBOR or unable to do so in sufficient size. The reported high take-up under the scheme – an initial £50 billion, expected to rise significantly further – is therefore surprising.

One explanation, as mentioned earlier, is that larger, unstressed banks have agreed to participate so that weaker institutions are not stigmatised for using the scheme. Banks may also be hoping that a high take-up will boost perceptions that the scheme represents a solution to the liquidity crisis and so help to restore confidence in the banking system, contributing to a fall in risk premia.

An alternative, more worrying possibility is that the problem of banks being unable to access the interbank market on reasonable terms is more widespread than previously thought. This would support claims that LIBOR seriously understates the true cost of funds for most institutions.

In this latter case, the SLS could be of significant benefit in reducing funding costs down to the quoted level of LIBOR. However, it remains unclear why it should result in a significant fall in the LIBOR-Bank rate spread.

For mortgage borrowers seeking to refinance fixed-rate loans, any helpful impact of the SLS may be outweighed by a recent sharp rise in short gilt yields and interbank swap rates, mainly due to international factors. As the chart shows, the two-year swap rate – a key influence on short-term fixed-rate mortgage pricing – has climbed 40 basis points since the April MPC meeting, reaching a four-month high.