Bank of England to the Rescue

The Bank of England have today announced plans to inject £50billion into the UK's stalling financial system in an attempt to alleviate the crushing effects of the credit crunch and revitalise Britain's mortgage market.

The 'Special Liquidity Scheme' will enable banks and building societies to exchange high quality debts (such as those acquired from mortgage and credit card lending) for more secure government backed bonds known as Treasury Bills. This in turn will help the financial institutions involved balance their books and free up cash for new lending.

While the initial plans were subject to much criticism the Bank of England have today announced further details about how the scheme will operate, providing reassurance that the tax payer will not be left footing the bill for other's defaults.

While announcing the scheme Mervyn King, Governor of the Bank of England, commented “The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.”

The scheme itself will be available for a 6 month period from today, during which banks and building societies will be able to trade their potentially risky debt based assets in return for Treasury Bills. This will be on a like for like basis with only AAA quality debts considered for the exchange.

To provide further security, financial institutions will be required to provide assets over and above the amount released to them by the Bank of England and will also be required to pay interest on the borrowing. What's more, if at any time the debt based assets should reduce in value, the associated bank or building society will have to provide additional collateral to compensate.

The exchange agreements will initially be valid for a year after which time Treasury Bills must be returned to the Bank of England, however there is potential to extend the scheme for up to 3 years so that banks are able to ride out any extended effects of the credit crunch.

The estimated £50billion necessary to fund this scheme represents the largest ever contribution to the banking system by the Bank of England, however with the current slowdown affecting the markets it's arguably a necessary one.

Since the end of last summer the situation has been getting progressively worse with struggling lenders forced to cut mortgage deals left right and centre after inter-bank lending became more cautious and increasingly expensive.

Almost three quarters of the mortgage deals previously available have now been retracted with high loan-to-value options withdrawn almost completely. This has caused many casualties along the way with homeowners left struggling with higher repayments and first time buyers unable to get on the ladder at all.