Will Bank’s intervention aid mortgages?


The Bank of England, backed by the Treasury, is considering a scheme to help ease Britain’s credit crunch by injecting much-needed liquidity into the financial markets by means of a ‘collateral swap facility’, which should help lenders offer more affordable mortgages.


[UKPRwire, Wed Apr 23 2008] The Bank of England, backed by the Treasury, is considering a scheme to help ease Britain’s credit crunch by injecting much-needed liquidity into the financial markets by means of a ‘collateral swap facility’, which should help lenders offer more affordable mortgages.

While details of the proposal are yet to be finalized, in essence it will enable banks to swap securities-backed mortgage collateral in exchange for government bonds of one to three years. This will help banks to shore up their balance sheets, though they will probably have to accept a reduction in their assets, receiving around £90 of bonds for every £100 of mortgages provided. However, banks will also be entitled to use a lower base rate to raise money through the bonds – 5% rather than the three-month Libor (London inter-bank offered rate) of 5.924%. This should help to ease mortgage costs, as it is the high rate of money-market funding that has been behind the rise in mortgage costs despite the Bank’s interest rate cuts this year.

In order to meet demand at rates which homeowners can afford, it is estimated that the Bank of England will need to make around £100 billion of bonds available. In return for this injection of liquidity, banks will be asked to strengthen their capital positions through fundraising.

While the introduction of this facility should help to ease the current credit impasse, the government has also been strongly criticized for acting too slowly. Whereas the US Federal Reserve slashed the rate of borrowing to 2.25%, from a high of 5.25% last August, the Bank of England cut rates to only 5%, from 5.75% last November. Michael Bolton, the chief executive of the leading mortgage specialists edeus, said that because of the government’s slowness to act, the current proposal “won’t help” and “all that will happen is that the banks, initially, will shore up their balance sheets. Unfortunately, the first wave, this liquidity crisis, is about to [be] followed by the second wave to hit the market; the real credit crunch.” He concluded that “if we had acted back in September and October, we probably could have pre-empted what is now going to be a far worse and rapidly deteriorating arrears and repossession situation."




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