Bank of England unveils near-100-billion-dollar lending package
LONDON (AFP) — The Bank of England announced a near-100-billion-dollar plan Monday to free up Britain's home loan market in one of the biggest moves by a major central bank to combat the global credit crunch.
The BoE said it would allow high street banks to swap mortgage-backed securities for government bonds in a bid to boost their liquidity at a time when banks are reluctant to lend to each other.
Britain's main home loan providers are rapidly tightening their lending criteria as fears persist over the sector's exposure to the collapsed subprime or high-risk housing market in the United States.
"The Bank of England is today launching a scheme to allow banks to swap temporarily their high quality mortgage-backed and other securities for UK Treasury Bills," the central bank said in a statement.
It added: "Discussions with banks suggest that use of the scheme is initially likely to be around 50 billion pounds (63 billion euros, 99 billion dollars)."
BoE governor Mervyn King said the measures could eventually reach double that amount.
The plan has "no arbitrary limit on it", King told reporters. "The amount may well turn out to be bigger (than 50 billion pounds)."
A growing number of commercial lenders have recently increased the interest rates they charge to their customers for home loans, contributing to a sharp slowdown in house prices.
The Bank's move to inject such a considerable sum of money into the markets could be seen as a major u-turn as it is traditionally more conservative in its support for banks than the European Central Bank and the US Federal Reserve.
Richard Hunter, Head of UK Equities at Hargreaves Lansdown, told AFP: "It is a step in the right direction. It would already appear that the Bank of England is ready to top this up to 100 billion pounds.
"The credit crunch is of course a global problem and central banks are trying to address it locally, but this particular gesture is mainly aimed at giving the UK lending market, which has clearly started to seize up, a break."
Other analysts were more sceptical.
Martin Slaney, head of spread betting at GFT Global Markets, said: "This rescue plan has been touted as a jump-start to the lending markets but it is more likely to serve as a one-off bail-out which plugs a hole for now.
"We are a long way off from returning to a more liquid lending market where mortgages are freely available."
The BoE said that under the new plan it would allow banks to swap their mortgage-backed securities over a period of between one and three years.
"The scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets," the bank said in a statement.
Many global banks have suffered heavy losses related to mortgage-backed securities that were effectively bets on high-risk US borrowers repaying their mortgage loans, which many were unable to do.
The worldwide squeeze on credit has already claimed British mortgage lender Northern Rock -- which was nationalised in February -- and US investment bank Bear Stearns, which has been sold off.
Britain's second-largest bank, the Royal Bank of Scotland, said Monday it would ask shareholders for a cash boost following reports that it was to announce fresh losses linked to the credit crunch and its consortium takeover of Dutch bank ABN Amro.
Chancellor Alistair Darling said Sunday that without intervention from the Bank of England, there was "every chance" Britain's financial crisis would worsen.
