The Bank of England Steps In

April 21st, 2008

Perhaps anxious to put some distance between himself and the mistakes of his boss, the Chancellor of the Exchequer has announced his strong support for the Bank of England scheme to stabilise the financial markets.

Under the scheme, banks will be able to swap potentially risky mortgage debts for secure government bonds to help them operate during the credit squeeze.

In a statement to MPs, Mr Darling said the Bank’s intervention was necessary because money markets were not “functioning properly” and were beset by a “lack of confidence” despite billions of pounds in liquidity being pumped into the system.

The measures, he said, would help alleviate the “increasing cost and declining availability of lending by banks and building societies”.

The swap scheme, starting on Monday, will be for a period of one year and may be renewed for a total of three years. It will only apply to mortgage debts on banks’ books at the end of 2007 and the swaps cannot be used to finance new lending. The central bank anticipates that initial take-up of the scheme will total £50bn but there is no cap on lending.

Mr Darling denied the support was a bailout, stressing that the risk of losses remained with the banks which will be required to pay a fee for the swap facility and provide the Bank of England with assets of greater value than the government bonds they will receive.

Banks have welcomed the move and said they were confident it would go some way to free up credit markets.

British banks have become increasingly unwilling to make loans, even to each other, as a result of the credit crisis, which was triggered by massive losses for banks involved in the US sub-prime mortgage market. And many investors, concerned at what happened to sub-prime mortgages in the US, no longer want UK mortgage-based assets.

The disappearance of this market has deprived banks of tens of billions of pounds of finance for mortgage lending.

Although it will not directly support new lending, the greater liquidity should free up bank balance sheets and enable them to lend more to consumers, home buyers and businesses.

The effect the new scheme will have on the current market conditions is still unknown, the scheme has been designed primarily to prevent another Northern Rock, not to try and bring down mortgage rates. It may take some time for confidence to return to the banks and market conditions for ordinary lenders to improve.

This entry was posted on Monday, April 21st, 2008 at 2:13 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

The Bank of England Steps In

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