KATHMANDU: Quantitative easing (QE) 3 is a monetary policy of the US which has been in the limelight following the Federal Open Market Committee (FOMC) meeting. Lots of analysts and policymakers all over the world have mulled over the pros and cons of such measures as the US tries to reverse its bleeding economy back to its prosperous stage. While the main question facing the Federal Reserve is whether to undertake another round of QE, the central bank may unleash a different weapon.

The European-style funding for lending scheme has emerged as a possible alternative in some quarters that could allow the

Fed to stimulate the underscoring economy than the outright popular QE. A case in point would be of the Bank of England (BoE), which has already undertaken a similar programme. The US could follow the same path, should Bernanke decide that the economy requires more liquidity in the form of bank-provided credit.

What is the funding for lending scheme? In the UK’s case, the BoE is lending short-term government bills to banks, which use the

securities as collateral to borrow money from the central banks at a rock-bottom rate — about 0.25

per cent — and then make loans.

Subsequently, banks can borrow up to five per cent of the value of their existing loans, and the loans from the BoE are of four year

duration. The programme closely resembles something the Fed tried in the aftermath of the financial crisis in 2008 with term asset backed securities loan facility.

However, instituting a similar programme could be somewhat challenging for the US. The Fed will be out of short-term debt when it wraps up its operation twist programme by the end of 2012. The twist involved selling short-term debt and buying longer-term notes in an attempt to drive down interest rates. There is also some legal dilemma over what type of collateral the Fed can accept if it cannot lend T-bills.

There are definite obstacles

in instituting this less popular programme. Yet, the Fed will dwell on the impending problem and try to implement every action possible before they finally turn to the dreaded measure of QE.

(The author is the senior assistant manager at the research and development department of Mercantile Exchange Nepal. He can be contacted through r&d@mexnepal.com)