Britain's biggest banks believe the Bank of England's emergency lending scheme will eventually have to pay out at least £100bn, or double the £50bn aid package initially proposed, sources said last night.
Senior bankers welcomed the Bank's offer yesterday but insiders predicted that the open-ended facility would probably have to double in size for it to have a significant effect.
The central bank confirmed that it would exchange banks' illiquid securities backed by mortgages and credit cards for ultra-safe Government bonds that lenders can use to raise cash.
The plan has been almost a month in the making. The Bank of England negotiated with banks and building societies to devise a scheme that provides liquidity without costing the taxpayer or rewarding reckless lenders.
Barclays, Lloyds TSB, Royal Bank of Scotland, HBOS and Abbey all said they would use the facility. Analysts said they expected all banks to swap their assets to take advantage of the longer-term funds on offer.
John Varley, the Barclays chief executive, said: "We are very supportive of this development. It is both innovative and substantive. Barclays is fully committed to making the new facility a success and will be an active participant." The scheme has no maximum limit, with the Bank saying it would "depend on market conditions". Industry sources said the swaps could reach £100bn or more because the gross mortgage market alone is worth £370bn.
Bank announces £50bn scheme
The asset swaps will be for one year and can be rolled over for a further two years. To protect the taxpayer, lenders will have to give up assets worth more than the Government bonds they are swapped for, and the risks of losses on the loans will stay with the banks. If the value of the assets falls, banks would have to provide more assets or return some Treasury bills.
The scheme is a one-off operation. Banks will have six months, starting yesterday, to take up the swap offer. In October 2011, the assets will be swapped back and the scheme will close.
The Bank will not report on whether the facility has been used until the scheme is closed, reducing the chances of individual banks being singled out and stigmatised. Barclays caused concern last year when it emerged that it twice used the Bank's overnight facility – a move that would have gone unnoticed before the credit crunch.
Bank shares fell yesterday, partly amid concern about the "haircuts" that lenders would take in swapping assets at a discount and also because of concern about further rights issues.
Howard Archer, chief European and UK economist at Global Insight, said: " For the scheme to have the maximum beneficial impact, several other developments really need to happen in tandem. These include greater transparency from banks on their losses and exposures to the sub-prime crisis, steps by the banks to improve their balance sheets ... and a commitment by banks to quickly reflect any fall in market interest rates in their products and loan rates to customers."
Lenders warned that there would be no quick relief for bank customers because it would take time for the benefits of the new liquidity to feed through the system. In the meantime, the cost of borrowing could continue to rise, they said. The three-month sterling interbank rate fell marginally to 5.885 – still way above the Bank's 5 per cent base rate.
The warning was underlined by Abbey, which said yesterday that it was pulling out of the buy-to-let mortgage market and raising the cost of some of its fixed-rate loans.