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New scheme to boost mortgage market

Catherine Deshayes

Bank of England Governor Mervyn King has announced that a new scheme aimed at boosting liquidity in the mortgage market will be unveiled next week.

The existing arrangements, under the Special Liquidity Scheme, involving up to £50 billion in bonds, were introduced in April of this year.

The Bank of England is today launching a scheme to allow banks to swap temporarily their high quality mortgage-backed and other securities for UK Treasury Bills.

With markets for many securities currently closed, banks have on their balance sheets an 'overhang' of these assets, which they cannot sell or pledge as security to raise funds.

Their financial position has been stretched by this overhang so banks have been reluctant to make new loans, even to each other.

Under the Scheme, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks.

By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets.

The new scheme, which Mr King said would be a short term measure, could help make available more finance to banks for mortgages.

Mr King also said that he was not supporting the idea of the Government taking a major stake in the UK mortgage market as banks had to take more responsibility for solving their own problems.