Global Economics

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

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.

Mr Osborne questioned whether the banks had given any commitment to pass on the benefit of the scheme to borrowers.

The shadow chancellor turned his attention to the Government's wider difficulties of unrest within Labour ranks over the abolition of the 10p income tax band.

"Doesn't the last nine months reveal the folly of a Prime Minister who failed to use the global good times to prepare for the difficult times.

"A competent government would be in a position to help people with the rising cost of living.

"Instead, this incompetent Government's 10p tax raise will add to the misery of the lowest-paid families already struggling with a rising cost of living and could broadly cancel out any help with mortgage costs that this scheme might bring."

He insisted it was not too late to back down and added that "we know ... this Chancellor is for turning".

Mr Osborne concluded: "The Bank of England is now playing its part to help families hit by the credit crunch.

"It's time for the Government to do the same. It's time for the Government to stop fighting itself and start fighting for the country.

"And it's time for a Government that is on people's side not on people's backs."

Mr Darling said it was for the Office of National Statistics to decide whether the bond issue would count against the national debt.

He insisted that any credit card debts taken on would-be "triple-A rated" but it was for the Bank to decide what collateral it accepted.

But, he added: "The Bank of England will ensure that it takes far more from the banks that it gives out in Treasury bills."

The Bank has suggested that £100 of collateral would secure bonds worth £70 to £90.

The Liberal Democrat spokesman Vince Cable also linked today's announcement to the abolition of the 10p income tax band.

"A strange day for the Labour Government when it is coming to announce that it advancing billions of pounds to the banks at the same time it is taking billions of pounds away from low-paid taxpayers," he said.

He likened the Chancellor to Little Red Riding Hood, who "went round trying to be kind and helpful but finished up being outmanoeuvred and then eaten by a wolf".

Mr Darling, he said, was "slowly in the process of being devoured by the British banking system".

At this point Labour backbencher Chris Ruane cried "Little Red Riding Hood wasn't eaten" prompting Speaker Michael Martin to quip: "Honourable Members are entitled to get stories wrong from time to time."

With order restored, Mr Cable said the banks should make rights issues to cover their losses, instead of "rattling their begging bowls" to the Government.

He said British house prices were over-valued by up to 30%, which could wipe out the safety margin insisted on by the Bank of England.

Mr Darling said: "I always thought that part of the Liberal Democrats' problem was that it did believe in fairy tales. I hadn't understood that it didn't know the ending of the fairy tales.

"I very much hope that when you go home this evening you will apologise for inadvertently misleading your grandchildren about the end of this particular nursery rhyme."


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