Bank of England's £50bn mortgage plan

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Monday, April 21, 2008

By Robin Morton

A £50bn rescue package for banks hit by the credit crunch was unveiled by the Bank of England today.

The move will see banks being able to swap their riskier mortgage-backed assets for Government bonds to shore up their finances.

The Bank of England's governor, Mervyn King, said: "The scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.

The Bank of England said the risk of losses under the scheme would be carried by the clearing banks.

Those companies taking part will have to provide assets of " significantly greater" value than the Treasury bills they receive to avoid the taxpayer taking on the risk of potential losses.

Banks will not be able to finance new lending under the scheme, which will last up to three years.

Mr King warned banks against using the funding to carry out the type of lending seen in the past, such as 100% mortgages.

"It's not part of this scheme to take us back to the excessive lending of a year or more ago."

Northern Ireland's four clearing banks were today awaiting full details of the Chancellor's proposed cash injection for the banking sector.

There was no immediate comment earlier today from Ulster Bank, Northern Ireland, First Trust or Bank of Ireland.

The Chancellor, Alistair Darling, was set to give full details of the plan to the House of Commons.

Critics have warned that the taxpayer is taking on the banks' risks and could be left nursing heavy losses if the property market keeps dropping and homeowners default.

Liberal Democrat spokesman Vince Cable warned that the move could effectively nationalise the banks' losses unless specific guarantees were given by lenders.

In the US, the Federal Reserve took similar action with a $200bn programme to boost liquidity in financial markets last month.