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Bank of England unveils multibillion-pound rescue package

EDS: AMs; CHANGES byline. Moving on general news and financial services.

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AP Business Writer


LONDON (AP) — The Bank of England unveiled a rescue package worth at least 50 billion pounds ($100 billion) for Britain’s financial system on Monday, making one of the biggest moves by a central bank worldwide to shore up confidence amid the global credit crisis.

The British central bank hopes its biggest-ever funding injection, to be made via a swap of assets, will increase liquidity — and in turn ease restrictions in the mortgage market that have made home loans more expensive — by encouraging interbank lending.

Bank of England Governor Mervyn King underscored the bank’s focus on restoring confidence by promising to meet demand even if it exceeds the 50 billion-pound level.

"There is no arbitrary limit on this so it could well go higher," King said of the offer that will allow banks to exchange potentially risky mortgage debts for more secure, and more easily tradable, government bonds. "Everyone needs to know this is there for them to access as needed."

Analysts said the plan would have some positive impact in the short term, but added that restrictions on the swap of assets and punitive terms on the offer might reduce demand from banks. The mortgage industry was also dubious about the proposal’s success in bringing down home loan costs.

"We believe the proposed asset swap scheme will help ameliorate pressures within funding markets," said Bank of America analyst Matt Sharratt. "Still, it is unlikely to be a silver bullet."

Several mortgage lenders have tightened lending criteria and increased the interest rates they charge for home loans, despite two reductions in the Bank of England’s official interest rate this year, because of fears over the sector’s exposure to the U.S. subprime mortgage market.

That has contributed to a significant slowdown in house prices across Britain.


The Bank of England hopes this situation will improve as banks use the more secure government bonds to restart lending among themselves. With more liquidity in the system, lending restrictions in the property market could then be eased.

The Bank of England will offer the swaps for a period of one year, renewable for up to three years. Only assets existing at the end of 2007 can be used in the swap, which will be on offer starting Monday.

The banks will keep responsibility for losses from the assets they loan to the Bank of England and must give the central bank assets of significantly greater value than the Treasury bills they have received.

Treasury chief Alistair Darling said the plan would support domestic lending, while the global financial system remains turbulent.

The British Bankers’ Association said the plan was an "an innovative and unique policy response."

"Restoring confidence in the wholesale funding market will strengthen the financial system and the stability of our economy," the association said.

However, Britain’s Council of Mortgage Lenders said that the proposal would not reverse the trend to higher mortgage costs, noting that many smaller mortgage lenders may not benefit from the plan because they do not deal directly with the central bank.

"What the scheme does not do is give all mortgage lenders direct access to the new funds," said CML director general Michael Coogan.


New Star analyst Simon Ward said that the plan may also prove ineffective because of an unattractive fee structure, adding that the "onus will be on the Bank’s Monetary Policy Committee to bring market rates down via further cuts in its Bank rate."

The Bank of England’s move to inject the hefty sum is a break with its usually more hands-off stance in contrast to its peers, the European Central Bank and the U.S. Federal Reserve.

Two similar funding facilities were announced by the Fed in March. Worth $100 billion each, they were larger than the Bank of England’s move in absolute terms, but the U.S. banking system is also much larger.

The British move is also double the value of loans the Bank of England extended last summer to prop up mortgage lender Northern Rock PLC, the country’s biggest casualty of the global credit crunch. The government later nationalized Northern Rock.

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