The Bank of England yesterday launched a scheme to allow banks to ‘swap temporarily their high quality mortgage-backed and other securities for UK Treasury Bills’.
It noted: ‘The main category of assets will be securities backed by residential mortgages. Securities backed by credit card debt will also be eligible.’
Explaining the banks’ desperate crisis, the UK central bank said: ‘With markets for many securities currently closed, banks have on their balance sheets an “overhang” of these assets, which they cannot sell or pledge as security to raise funds.
‘Their financial position has been stretched by this overhang so banks have been reluctant to make new loans, even to each other.’
Glossing over the dodgy character of mortgage debts held by the banks, the Bank of England statement continued: ‘Under the Scheme, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills.’
Assuming that the banks will be able recover their position in the face of defaults, the BofE added:
‘Responsibility for losses on their loans, however, stays with the banks.’
It claimed: ‘By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets.’
Hopeful that the crisis will not last longer than three years, the Bank of England said: ‘Each swap will be for a period of one year and may be renewed for a total of up to three years.’
Revealing that in fact the scheme is an open cheque to banks from government, the Bank of England said that ‘given its scale, the Scheme is indemnified by the Treasury’.
The Bank added: ‘The public sector would be exposed to a loss only in the very unlikely event that a participating bank defaulted and the value of the assets it had placed as security with the Bank of England later proved inadequate to cover the value of the Treasury bills that had been swapped for the assets.’
The press statement said: ‘Usage of the scheme will depend on market conditions.
‘Discussions with banks suggest that use of the scheme is initially likely to be around £50bn.’
In a briefing note the Bank said: ‘Financial markets are not working normally, which if left unchecked will have an impact on the wider economy.
‘Across the world, there is a lack of confidence in assets created from packages of bank loans, most notably mortgage-backed securities.’
It revealed: ‘Since August (2007), the Bank of England has increased by 42% the amount of central bank money made available to financial institutions.
‘It has increased from 31% to 74% the proportion of its lending to the market that is for a term of at least three months.’
Under the new Scheme, ‘by October 2011, all assets will have been returned to the banks, all Treasury Bills to the Bank of England, and the Scheme will close.’
Commenting on the Bank’s announcement, Liberal Democrat Shadow chancellor, Vince Cable, said: ‘It is obviously necessary for urgent action to be taken to unblock the mortgage market and to break the crippling effects of the credit crunch.
‘However, we cannot have a situation where the banks are able to privatise their profits and nationalise their losses.
‘Since the mortgages from the banks are of inferior quality and higher risk than the government bonds which they are replacing, the implication must be that taxpayers are shouldering the risks and losses of the banks. This cannot be right.’
Trade unions contacted by News Line said they had no comment to make on the move.