£50bn UK offer for mortgage securities

By Chris Giles and Peter Thal Larsen in London
Published: Apr 21, 2008

The housing market will not see a return to the profligate mortgage lending practices of the past few years, the governor of the Bank of England insisted on Monday as he announced a massive operation to support liquidity in British banks.

Making an almost unlimited offer to acquire UK banks' mortgage-backed securities for up to three years in return for Treasury bills, Mervyn King said the plan would "take the liquidity issue off the table in a decisive way". But he warned that the objective of the plan was neither to persuade banks to start lending again nor stand in the way of a housing market correction.

His stern words contrasted with those of Alistair Darling, the chancellor, who told Parliament he hoped: "This [scheme] will help alleviate the problems that have seen banks reluctant to lend to each other and in turn support the provision of new mortgage lending."

For the next six months, the Bank will offer to acquire asset-backed securities from banks in exchange for Treasury bills. Based on conversations with commercial banks, the Bank expects to swap £50bn assets in the first couple of months.

With stiff conditions on the deal and a high price on use of the facility, the Bank believes it has ensured only a minimal risk for taxpayers. It wants financial markets to be sure that solvent British banks will be able to settle their debts in future without any fear they will be struck down by shortages of liquidity.

In so doing, Mr King insisted his aim was to underpin the financial system rather than bail out banks and building societies or support new mortgage lending. "The objective is not to protect the banks but to protect the public from the banks," the Bank governor said, although he said he hoped a side-effect of the scheme would be to bring down interbank borrowing rates.

British bankers on Monday agreed that the plan would help to restore confidence to the sector. Stephen Green, chairman of HSBC, said: "At an industry level, the Bank of England initiative will help ease some of the current market dislocations in the UK."

But there was little sign that the Bank's action would kickstart the faltering mortgage or housing markets.

Unlike the chancellor, Mr King insisted that was not his objective. He called again for banks to raise capital from the markets and insisted that "the scheme is not designed to send the mortgage market back to the rather wild lending before the turmoil began last summer", adding that there "needs to be some adjustment in the housing market and this scheme is not designed to impede this adjustment".

Bankers also stressed that the move was unlikely to lead to a significant reduction in mortgage rates for consumers, or revive the kinds of generous mortgage offers that lenders have become used to in recent years.

Such words put banks on a collision course with the government, facing pressure to act. Mr Darling said that in his meeting on Tuesday with mortgage lenders he would "discuss with them how they can pass on the benefits of falling interest rates as well as wider government support to mortgage holders".

The Bank's move puts it at the forefront of the central bankers' efforts to tackle liquidity problems in banks, providing much more and longer-term liquidity than either the Federal Reserve or European Central Bank. It would support long-term liquidity by swapping high-quality triple A-rated securities, including those backed by mortgages and credit cards, for government paper for up to three years.

Risk to UK taxpayers would be minimal because banks retained liability for defaults on assets and would be offered considerably less in government paper than the market value of assets.