Government plans to help UK banks[Swap Their Mortgage-based Assets for Government Bonds]

BBC ^ | 16 Apr 2008 | BBC

[BGHater]

The housing market has been hit falling numbers of available mortgages

The Bank of England is poised to launch a new lending programme for UK banks in an effort to break the logjam in the credit market, the BBC has learned.

Final details are still being worked out including the scale of the plan and the exact terms.

But it will be similar to moves in the US, will be backed by the Treasury and could be launched as soon as next week.

The scheme would temporarily allow banks to swap their mortgage-based assets for government bonds.

The hope is that banks will find it easier to borrow and lend to other banks using these bonds as security, which in turn would ease up lending to individual borrowers.

The government is going down the disastrous road of bailing out the banks and leaving the taxpayer with the liabilities, Vince Cable, Liberal Democrats What the plan means for you No easy answers to the credit crunch

The government does not consider this a bail-out of the banks and the BBC's economics editor, Stephanie Flanders, understands the scheme will not go ahead unless it can be designed to protect the taxpayer from any loss.

One safeguard will come from exchanging the mortgage-backed assets at less than their market value.

Banks are likely to welcome the plan, though it would need to be on a larger scale than previous efforts if it is to make a significant difference.

Taxpayer risk

Vince Cable, deputy leader of the Liberal Democrats, acknowledged the need for action but said the taxpayer should not take on the risks and losses of the banks.

"We need to see the small print of what's being proposed," he said.

He said banks' mortgage-based assets are being exchanged for safer government debt, therefore the government is taking the banks' risks onto its balance sheet.

"I am very concerned that in addition to all the costs associated with Northern Rock, the government is going down the disastrous road of bailing out the banks and leaving the taxpayer with the liabilities."

On Tuesday, Gordon Brown met with leading UK bankers, who urged the government to intervene in the money markets.

British mortgage lenders have warned that lending could halve this year unless more action was taken by the government.

The rate at which banks lend to each other has been rising, which has meant that banks are toughening up their lending terms even though official interest rates are falling.

Mr Brown, in the United States, said earlier the government was looking at ways to inject liquidity into money markets on a sustained basis.

[BGHater]

Bank ping

[BGHater]

Q&A: Government plan to help UK banks

The plan should make it easier to get a mortgage

The Bank of England is poised to launch a new lending programme for UK banks in an effort to break the logjam in the credit market, the BBC has learned.

The scheme would temporarily allow banks to swap their mortgage-based assets for government bonds.

The BBC's economics editor, Stephanie Flanders, explains the implications:

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How much will this cost taxpayers?

In theory, not a penny.

The Treasury has to put up the money for the Bank to provide the government bonds to banks in exchange for their mortgage-backed assets, but officials are trying to design the scheme so the taxpayer is protected from any fall in the value of those assets (or the mortgages they are based on).

There are lots of ways they might provide that insurance, but the main safeguard would be exchanging the assets at a discount below their market value.

Some in the City are sceptical you can protect the taxpayer completely, but people familiar with the scheme say the government won't go ahead with it if they aren't satisfied on this point.

Will this make it easier to get a mortgage?

That's the hope - though it would be an indirect effect of the scheme, and the Bank would hope that all kinds of borrowers - small businesses, for example - are helped by this move as well as mortgage borrowers.

The idea is that banks will become less reluctant to lend to one another, so they will pay less for the money they borrow on money markets, which hopefully will mean they charge less for the money they lend to all of us.

Do the banks deserve this bailout?

The Bank and the government would not consider this a bailout.

All it's supposed to do is ease the logjam in the money markets. It's not letting banks off the hook for making bad loans.

There has been some discussion in the US and in the UK of the central bank buying mortgage-backed assets outright.

That would be closer to a bailout because banks would be literally getting rid of the assets.

Since this is a swap - a loan - it's less vulnerable to that kind of criticism.

If this scheme boosts confidence in the banking sector and pushes up the bank shares, some will argue that it is supporting bank shareholders. But that's an inevitable consequence of trying to prevent the credit crunch spreading any further to the real economy.

Why is the government doing this now?

The Bank and the government have been thinking about taking more action for several weeks and discussing it with the big banks.

Things got more serious over the past week or so, as the rate at which banks lend to each other (the Libor) started going up again, suggesting that the problems in the money markets were not getting any better.

The Bank of England's special auction for the banks on 16 April also helped bring things to a head, because it was clear from the banks' bids for money in that auction that they wanted a lot more longer-term (six months or more) lending than the Bank had previously made available.

The new facility will meet that need since the swaps will last a year or more.

http://news.bbc.co.uk/2/hi/business/7351506.stm

[utherdoul]

Nope the UK has a strong currency. Absolutely nothing bad can happen to an economy as long as they have a strong currency. Weak currency’s cause cancer and oil shortages.

[Lorianne]

Corporate welfare.

Bailout

[quant5]

Hey not a bad racket, I’ll build a bank too big to fail, use schemes, fraud and off the books deravatives skim myself about $100 M and then hand the risk to the taxpayers! Really, how about letting some of banks fail, housing bottoms and the willpower created out of necessity drives innovation in energy independence creating millions of jobs where people can then afford housing and a simpler but secure way of life. I guess I should never run as an Anglo-Saxon politician, I would be despised for being too common sense.

[thundrey]

If banks were allowed to fail and people lost their savings, it would cause millions of people to start stuffing their savings under the mattress again. Thus precipitating the collapse of the modern capitalist system. It is absolutely essential that people maintain the confidence that any money they have in the bank is safer than it is under their own floorboards...

[quant5]

The fiat money system controlled by government and central bankers was bound to fail at any given time. Even if fiat currency itself is a good idea, those managing it cannot but help to apply government ideas like Socialism into the mix and nor can those manage it prevent greed and lack of oversight prevent it’s abuse. Systemic bank collapse last month would indeed have been very bad, but my preference is to correct sharply back to the fundamentals, even if crash occured. I would prefer this then to have what we are seeing now, further Socialism tax my responsible behavior and long-day work ethic for the irresponsible and the inevitable crash occur later.