BoE Launches $100B Bank Rescue Plan

The plan, to allow banks to trade mortgage-backed securities for Treasury bills, will help resolve problems in the wholesale financial markets

by Trevor Mason and David Hughes

Chancellor Alistair Darling today welcomed the Bank of England's £50 billion rescue package for banks hit by the credit crunch.

Mr Darling told MPs the announcement would help resolve problems in the wholesale financial markets.

It should subsequently assist businesses, individuals and the mortgage market.

Flanked by the Prime Minister, Mr Darling said financial markets around the world remained "turbulent" but insisted the UK financial system remained "fundamentally strong".

Shadow Chancellor George Osborne broadly welcomed the Bank's move but urged the Chancellor to promise that there would be no loss to the taxpayer.

The Bank of England's move will see banks able to swap their riskier mortgage-backed assets for Government bonds to shore up their finances.

Reporting to MPs as they returned to Westminster after the Easter recess, Mr Darling said in a statement the scheme was developed after extensive discussions with the Treasury and the Financial Services Authority.

"The UK financial system remains fundamentally strong and the Bank of England's action has helped take some of the pressure out of the system by giving the banks additional liquidity to continue their usual banking operations."

Today's scheme was a further step towards tackling the problems arising primarily from the US sub prime mortgage failure.

Under it the banks will continue "to hold the risk on the securities they provide, so it is them rather than the Bank of England that will be exposed to any fall in value".

He stressed there was no subsidy to the banking sector.

Mr Darling said maintaining economic and financial stability was the Government's key priority and promised further action to restore stability in the financial markets.

Ministers were about to finish consulting on reforms to the banking system aimed at making it easier to intervene if a bank gets into trouble.

Further discussions would be held with the industry on details of the proposals before legislation was brought forward.

"I can confirm that it remains our intention to introduce legislation this session to strengthen financial stability and depositor protection."

Insisting that he was determined to do everything he could to help homeowners, the Chancellor said he would meet major lenders tomorrow.

Banks and building societies had a duty to treat their customers fairly.

At the meeting there would be discussions on how people whose fixed rate mortgages were coming to an end could be helped, as well as on assistance for those who may get into repayment troubles.

"I want to discuss with them (the banks and building societies) how they can pass on the benefits of falling interest rates as well as wider Government support to mortgage holders."

Mr Osborne said Britain had been left "more exposed than any other European country" to the credit crunch with the "highest personal debt on record".

To Labour laughter he said it was time to look at "counter cyclical capital rules" to try to avoid "boom and bust" problems in the future.

Mr Osborne said he "broadly welcomed" the Bank's liquidity scheme. "We were recently calling for it. The difference between a well judged intervention and a bail out lies in the details and the protection offered to the taxpayer.

"Will you give us your personal promise today that, as the man entrusted with the nation's finances, you believe the guarantees are such that there will be no loss to the taxpayer."

He said the risk to the taxpayer would be be reduced further if the Government had not agreed to indemnify securities backed by credit card debt, as well as those backed by mortgages.

"Why have you done that? We are trying to keep people in their houses, not prop up credit card lending."

Mr Osborne said the scheme was designed to "keep the taxpayer exposure off the balance sheet" with the swaps lasting 364 days instead of a year, "because if they were a day longer then £50 billion of debt would be added to the national debt".

He also raised concerns that the bonds may be swapped for credit card-backed securities rather than mortgage assets.