Bank ‘preparing £50bn bank package’
Banks’ interlending difficulties could be eased by a £50 billion package reportedly being planned by the Bank of England.
The BBC says the central bank is hoping to offer banks government bonds, one of the safest investments, in exchange for mortgages held by British banks – whose value has been affected by the US housing crisis.
Government bonds will have a maturity of up to a year under the reported plans, meaning under existing accounting procedures they will not be considered part of the country’s national debt.
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.
The inability of US homeowners to meet mortgage payments has led to global concerns as investment banks had created securities tied to these loans that were sold to investors and institutions around the world.
Financial institutions around the world have written off close to $200 billion (£100 billion) as housing investments turned worthless, with the world’s biggest investment banks such as Citigroup, Merrill Lynch and UBS reporting quarterly losses in the billions due to the defaults.
Banks have hoarded cash since then in order to deal with their losses leading to a lack of availability of funds in the credit markets.
The relatively higher rate of interest charged on banks’ lending to each other is a result of uncertainty in the global markets which the Bank of England is now acting to ease by offering bank’s safe capital in exchange for assets of doubtful value.
Earlier this year, the government nationalised mortgage specialist Northern Rock as it struggled to finance itself in the wake of the credit crisis.
