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King unveils £50bn banks bail-out

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Date: Monday 21 Apr 2008

LONDON (ShareCast) - The Bank of England has confirmed details of a £50bn plan to swap bank mortgage debt for government bonds to ease the impact of the credit crunch on the housing market.

Under the scheme, initially for £50bn worth of bonds but with no upper limit, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks, the Bank said today.

Each swap will be for a period of 1 year and may be renewed for a total of up to 3 years. The risk of losses on their loans remains with the banks. The swaps are available only for assets existing at the end of 2007 and cannot be used to finance new lending, added the Bank. During the lifetime of an asset swap, banks will be required to pay a fee based on the 3-month Libor rate.

"The Bank of England's Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks," governor Mervyn King said.

The Bank has also insisted that assets pledged as collateral are of “significantly greater value than the Treasury Bills they have received.” If the value of those assets were to fall, the banks would need to provide more assets, or return some of the Treasury Bills.

Chancellor Alistair Darling said yesterday that the move was to “ease” the market. “We believe that this will be an essential step in trying to get the financial market stabilised. That in turn will help the mortgage market too,” the Chancellor said.

The mortgage market has stalled in recent months as the credit crunch has stopped banks lending to each other. As a result, mortgage lenders have severely reduced the amount they lend, stopped lending altogether in some cases, or else put up interest rates to choke off demand.