The Bank of England offers to swap government bonds worth 50 billion pounds
for banks' riskier mortgage debt, as Prime Minister Gordon Brown vows to do
"everything in our power" to try to ease the effects of a credit
crunch on Britain's banking system.
LONDON, UNITED KINGDOM (FILE) REUTERS -
The Bank of England is offering to swap government bonds worth 50
billion pounds (100 billion U.S. dollars) for banks' riskier mortgage debt to
try to ease the effects of a credit crunch on Britain's banking system.
The central bank said on Monday it was offering to swap the gilt-edged
government securities for a range of high quality bank assets, including
mortgages.
The asset swaps will be for one year and may be renewed for a total of
three years, helping the banks -- who are currently unable to shift the
currently unattractive mortgage debt -- with longer term assistance.
"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," BoE Governor Mervyn King said in a
statement.
The scheme is being guaranteed by the British Treasury but has been
designed to avoid the public sector taking on the risk of potential losses.
"What we're trying to do is to ensure that we can help return
something approaching normality to the financial markets. We can't let a
situation continue where banks won't lend to each other, where that's
constraining their ability to lend to businesses, to individuals, and
providing mortgages," Finance Minister Alistair Darling said on Monday.
Prime Minister Gordon Brown reiterated his government's determination
to defend "British workers and British working life" in the face of
a global financial crisis.
"First of all we will make sure, as we have done today, that there
is enough liquidity in the economy so that we can continue to lend money for
businesses, and lend money for people to buy their own houses," Brown
told the Scottish Trades Union Congress.
"That's why the Bank of England has announced today that there
will be 50 billion at least extra liquidity in the economy so that we can get
markets working again in a way that we can ensure that jobs can be continued,
and of course businesses have the finance they need."
Some analysts said the plan could boost sentiment but would not reverse
the impact of the credit squeeze.
David Keeble, Head of Interest Rate Strategy at Calyon Credit Agricole,
described as "a last resort in one way."
"This particular system they've announced today really isn't
designed for ongoing operations with banks that generally have good access to
the markets. It's really designed, I think, more as an emergency measure for a
bank that may have trouble funding itself. Perhaps in the future we may see
other tinkering by the Bank of England in the money markets, but this is a
reasonable, good first step," Keeble said.
The global credit crunch that has followed a sharp downturn in the U.S.
subprime mortgage market has left British banks wary of lending to each other
or offering new home loans despite three interest rate cuts by the BoE since
December.
In the United States, the Federal Reserve last month took similar
action with a 200 billion U.S. dollars programme to boost liquidity in
financial markets.
Monday's BoE move is aimed at freeing up bank balance sheets so
companies can lend more to consumers who face declining house values, fewer
mortgage options, and soaring oil and food prices.
In return, the government is expecting banks to take more action to
shore up their own balance sheets.
Royal Bank of Scotland, Britain's second largest bank, confirmed on
Monday it was considering a share issue and others in the sector are expected
to follow. People familiar with the matter have told Reuters RBS is seeking to
raise over 20 billion U.S. dollars.
