Bank of England Offers £50 Billion Mortgage Bail-Out

Britain’s central bank, the Bank of England, has announced a £50 billion mortgage bail-out. With the banks hesitant to lend even to each other, something needs to be done. The response from the City, however, has been less than enthusiastic. It appears that the price of the rescue is more than many in finance are prepared to pay.

Under the terms of the Special Liquidity Scheme, banks can swap their mortgage-backed assets for government bonds. The Bank of England stated, “The asset swaps will be for long terms. Each swap will be for a period of 1 year and may be renewed for a total of up to 3 years. The risk of losses on their loans remains with the banks. The swaps are available only for assets existing at the end of 2007 and cannot be used to finance new lending.”

The Times reported, “Banks will be required to pay a fee based on the three-month London Interbank Offered Rate (Libor), the rate that banks charge to lend to one another, for the bonds. The BoE will issue bonds valued at a 10 per cent to 30 per cent discount on the value of the banks’ assets.” The paper also stated, “David Buik of BGC Partners, the inter-dealer broker, said: ‘The initial reaction to the scheme has been rather luke-warm. It is early days but the cost of these facilities seems to be ... prohibitively expensive in current conditions’.”

The BBC’s business editor Robert Peston wrote, “the Bank of England is becoming the market for mortgage-backed securities. This is a banking-market bail out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that. Also, this is no quick fix. The Bank of England is no longer hoping that all will be back to normal in a matter of days or weeks. The support will remain in place for three years. The scheme is so substantial that the Bank of England has had to be indemnified. So taxpayers will be at risk.”

This has the look of a rescue package that doesn’t satisfy anyone. The banks are saying the money is too expensive, and the taxpayers are picking up the tab if any of the assets goes under. One starts to wonder if the BoE will have to sweeten things for the banks before they accept being helped.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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