Bank of England offers plan to help with credit crunch

The Bank of England yesterday announced a £50 billion (US$100 billion) plan to allow banks to swap mortgage-backed securities for Treasury bills.

The bank’s aim is to unblock the interbank lending market and restore normal lending practices hampered by the subprime credit crisis. The asset swaps for one year, but renewable for up to three years, but only for assets which existed at the end of last year, the central bank said. The risk of losses on the swapped assets remains with the commercial banks, not the taxpayers, the Bank of England said.

“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,” bank Governor Mervyn King said.

The Bank of England swap offer began yesterday and will continue for six months.

Banks will be able to swap a range of high-quality assets, including AAA-rated securities backed by UK and European residential mortgages for Treasury bills.

Even though the assets have significant value, banks can’t use them to raise money because all such securities are tainted by the crisis over lower-quality securities backed by mortgages given to people with weak credit.

The swap gives the banks assets they can use to operate, in the hopes they will then resume lending more — and support the housing market and the overall British economy.

“Given its scale, the scheme is indemnified by the Treasury, but is designed to avoid the public sector taking on the risk of potential losses,” the bank said.