“Determined” Darling outlines Bank rescue plan
Alistair Darling has explained to parliament the Bank of England’s plan to swap mortgage debts for government bonds to free up struggling interbank lending.
The chancellor confirmed the scheme, designed to help lenders operate through the credit squeeze, in a statement to the Commons this afternoon.
He said the special liquidity scheme would see around £50 billion of government bonds being exchanged with “high-quality asset-backed securities”.
The government hopes its initiative will help alleviate interbank lending difficulties caused by concerns about the value of mortgages currently held.
Under the plans lenders will enter into agreements with the Bank for six-month periods for a maximum of three years, while it will be banks who are exposed to any fall in value in the housing market.
“Obviously we want to make sure that institutions are sound but we also want to see the benefits of what’s happening passing through to homeowners in this country,” Mr Darling said.
Questioned by Treasury select committee chairman John McFall about moral hazard, he added: “No government could simply say, ‘Well, it really doesn’t matter’.
“It’s right for the Bank of England to take action. It’s right we’ve spent the last few weeks developing this proposal which will help begin the process of getting back to normality.”
Shadow chancellor George Osborne voiced doubts about the liquidity scheme, warning the details would prove “the difference between a well-judged intervention and a bailout”, but said his party broadly welcomed the move.
Liberal Democrat economic affairs spokesperson Vince Cable said the chancellor reminded him of Little Red Riding Hood, a character who tried to be “kind and helpful” but “ended up being eaten by a wolf”.
“The chancellor is in the process of being slowly devoured by the British banking system,” he observed to laughter.
An initiative to help the banking system had been widely anticipated, after banks reportedly told prime minister Gordon Brown during a meeting at Downing Street last week that more had to be done to ease the credit crunch.
Banks have already withdrawn several mortgage products from the market and some are ignoring the most recent base rate cut but it is hoped the benefits of the new scheme will be passed on to consumers.
“We are determined to do everything we can to help homeowners,” Mr Darling added.
US Federal Reserve chairman Ben Bernanke announced a similar move to US banks for troubled subprime loans earlier this month alongside measures to allow investment banks to borrow directly from the American central bank.
Earlier this year, the government nationalised mortgage specialist Northern Rock as it struggled to finance itself in the wake of the credit crisis.
