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Bank of England agrees to £50bn bond rescue plan

The Bank of England has agreed to bolster the UK mortgage market by swapping £50bn of government bonds for banks’ mortgage-backed securities.

The Government is hopeful that the banks will use the bonds to restart lending between themselves which will improve liquidity in the market and make funds available to mortgage customers.

The swap is expected to significantly undervalue the mortgage-backed securities in order to ensure the risks stay with the banks and are not passed onto taxpayers.

Speaking yesterday, Chancellor Alistair Darling said that the Bank will “lend money to unfreeze the situation we have got at the moment. We are trying to unbung that situation so that the Bank will be making money available to the British banking system.”

John Charcol senior technical manager Ray Boulger says: “It will help but it is difficult to know how much help it is going to be. If it merely stops the situation deteriorating further then it will be regarded as a success.

“The three-month Libor rate will be an indication of whether it has worked to a certain extent. If it sticks at the 5.9 per cent mark tomorrow then it will suggest that it hasn’t worked.

“If we are still getting lenders announcing negative changes to their products at the end of the week then that will not be too positive. We have to wait a few days to see.”

CML director general Michael Coogan says: “This is a welcome move by the Bank of England, previously requested by the CML, to address the liquidity shortage which is undermining the markets and keeping Libor stubbornly high. Mortgage assets in the UK continue to perform well, and the Bank has structured the scheme to ensure banks and building societies pay an appropriate price for the facility to minimise the risks for taxpayers.

“What the scheme does not do is give all mortgage lenders direct access to the new funds. In particular, it does not include smaller building societies and specialist lenders.

“Further details are also awaited on how much of the additional liquidity might be recycled responsibly into mortgage products or pricing, so that lenders can bridge the gap between how much consumers want to borrow and how much funding is available this year.

“The recent trend of mortgage products being removed and mortgage prices increasing for new customers will be affected more by how Libor responds to the announcement. The improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks.”

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