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Last Updated: Apr 21st, 2008 - 15:28:58 |
LONDON (Reuters) - The Bank of England unveiled an ambitious plan on Monday to swap banks' risky mortgage assets for 50 billion pounds or more of government bills, in the latest bid to spare the country from the ravages of a global credit crunch.
Central banks globally have tried desperately to inject confidence back into markets, but despite eight months passing and billions spent, banks remain afraid to lend money because they don't know each others' exposure to bad U.S. home loans.
In Britain, the credit crunch has already taken down Northern Rock bank and concern is building over the financial system and the wider economy as new buyers are shut out of the housing market as cash-strapped lenders restrict mortgages.
Prime Minister Gordon Brown, whose popularity has slumped as voters lose faith in his handling of the economy, has made jumpstarting the mortgage market a priority for his government as fears of a housing market crash have shot up in recent weeks.
Chancellor Alistair Darling will meet with lenders on Tuesday and is expecting them to do their bit for the economy by passing on the Bank's three interest rate cuts to consumers.
Speaking to reporters after the plan was announced, BoE Governor Mervyn King said the Special Liquidity Scheme (SLS) would not make things better overnight but would at least give banks access to a greater pool of cash.
The 50 billion pounds was just a start, there was no arbitrary limit, he said.
"What we have to do is to create an environment in which a bank knows that not only it, but other banks, can come to the Bank of England and exchange their illiquid assets for liquid assets," he said. "It is restoring confidence in banks being able to deal with each other that is key in this."
Interbank lending rates fell modestly on Monday after the plan was announced but are still some way higher than the Bank's main lending rate. Analysts remain sceptical about whether the scheme will be the silver bullet required.
"We still have doubts over the extent to which the scheme can address the fundamental problems in the housing market and wider economy," said Jonathan Loynes of Capital Economics.
NO BAILOUT
Under the scheme, banks can get one-year government bills for highly rated mortgage debt which can then be rolled over the at the central bank's discretion for up to 3 years.
King, who has long taken a hard line on the dangers of moral hazard, said the facility was in no way a bailout of banks as any government securities they got would come at a hefty price or, in the jargon, haircut.
Banks will also have to pay an additional fee to make sure they pay a market rate for the government debt. "This is not a gift," said King, but he rejected the suggestion that the scheme required some quid pro quo from the banks.
He welcomed, however, the moves by some banks to recapitalise themselves. Royal Bank of Scotland, the second largest bank, said on Monday it was considering a share issue and others in the sector are expected to follow.
JP Morgan estimates the capital shortfall of the four large banks -- Royal Bank of Scotland, HBOS, Barclays and Lloyds TSB -- at nearly 37 billion pounds. People familiar with the matter have told Reuters that RBS is seeking to raise over $20 billion (10 billion pounds).
Chancellor Darling will make a statement to parliament later and is expected to call on financial institutions to make a full and early disclosure of their losses.
Lehman Brothers estimates that overhang at around 35 billion pounds.
Banks are expected to take more action to shore up their own balance sheets in tandem with the BoE action.
"...If you look at what's been happening in the last few days, the pressure on banks to declare the extent of any losses they've made ... and how they are going to deal with it and how they are going to raise money from their shareholders -- I think you'll see much, much more of that," Chancellor Alistair Darling said.
JPMorgan estimates the capital shortfall for the four large banks -- Royal Bank of Scotland, HBOS, Barclays and Lloyds TSB -- at nearly 37 billion pounds.
Royal Bank of Scotland, the second largest bank, confirmed on Monday it was considering a share issue and others in the sector are expected to follow.
People familiar with the matter have told Reuters RBS is seeking to raise over $20 billion.
For the full text of the BOE statement please click on the link below
http://www.bankofengland.co.uk/publications/news/2008/029.htm
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