Monday, April 21, 2008

Bank of England Offers $100 Billion Debt Swap

Bank of England offers banks $100B program to swap mortgage-backed securities for UK issues.

The Bank of England, aiming to deal with the crippling impact of the U.S. subprime mortgage crisis, on Monday announced a $100 billion plan to allow banks to swap mortgage-backed securities for British Treasury bills.

The bank's aim is to unblock the interbank lending market and restore normal lending practices to banks and home buyers hampered by the subprime credit crisis. The asset swaps are for one year, but renewable for up to three years -- and only for assets which existed at the end of last year, the central bank said. The risk of losses on the swapped assets remains with the commercial banks, not the taxpayers, the Bank of England said.

"The Bank of England's special liquidity scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks," said central bank Governor Mervyn King. The Bank of England is offering the swaps starting Monday and continuing for six months.

Banks will be able to swap a range of high-quality assets, including AAA-rated securities backed by UK and European residential mortgages for Treasury bills. Even though the assets have value, banks can't use them to raise money because such securities are tainted by the crisis over lower-quality securities backed by mortgages to people with weak credit.

The swap gives the banks assets they can use to operate, in hopes they will then resume lending more -- and support the housing market and the overall British economy. Britain's biggest casualty of the credit cruch was mortgage lender Northern Rock, which had to turn to the Bank of England for emergency funding and eventually wound up in public ownership.

"Given its scale, the scheme is indemnified by the Treasury, but is designed to avoid the public sector taking on the risk of potential losses," the Bank of England said. "Banks will need, at all times, to provide the Bank of England with assets of significantly greater value than the Treasury bills they have received. If the value of those assets were to fall, the banks would need to provide more assets, or return some of the Treasury bills."

The Bank said the size of the liquidity injection would depend on market conditions, but it said the commercial banks suggested that they were likely to subscribe for about 50 billion pounds in swaps.

The Bank of England's announcement came as property website Rightmove reported that asking prices in England and Wales have fallen by 0.1 percent over the past month as sellers accept their homes are no longer worth as much as they once were.

The fall in asking prices between March 16 and April 12 followed a 0.8 percent rise in March and a 3.2 percent jump in February. The annual rate of price growth has also slowed sharply, falling to just 1.3 percent during the year to April 12, down from 5 percent a month earlier.

The British Bankers' Association said the plan was an "an innovative and unique policy response." "The banks expect it to make a significant contribution to alleviating the pressures in the U.K. money markets. Restoring confidence in the wholesale funding market will strengthen the financial system and the stability of our economy," the association said.

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