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BoE Mortgage Plan has No Upper Limit: King

Reuters
Monday, 21 Apr 2008 | 6:52 AM ET

The Bank of England's mortgage rescue plan has no upper limit on the amount banks can swap for government debt and it would depend on what they needed to meet their operational needs, BoE Governor King said on Monday.

King said no demands had been made on banks wishing to partake in the scheme, which the central bank has said could initially involve around 50 billion pounds ($100 billion) in rolling one-year Treasury bills.

"There is no arbitrary limit on it -- it may well go higher," King told reporters at a briefing after the BoE announced its scheme.

King said the 50 billion pound figure had been based on discussions with major banks and did not include all 119 institutions eligible.

The plan was designed to help the economy and not bail out banks, King said, adding he did not want mortgage lending to return to its previous elevated levels.

"The purpose is to protect the rest of the economy from the banks," King said.

"Banks themselves are going through a difficult and painful adjustment ... This cannot be avoided." "If you need it, it is here.

But there is a price to pay for it." Banks wishing to take part in the scheme will be required to pay a fee, based on interbank lending rates, and assets would be swapped at a discount -- or haircut, the BoE said.

"This is fair way of charging. This is not a gift," King said, but added banks were not being forced to take any action in return.

Markets had speculated British authorities might require a "quid pro quo" response from banks, involving capital raising.

"The BoE has no powers or authority to instruct the banks to do anything," he said, but welcomed moves by some banks to raise new capital.

Bring Down Rates

It is hoped the measures will bring down the rate at which banks lend money to each other, by reducing fears about the quality of the balance sheets of counterparties.

That in turn, could lead to softer terms for consumers.

Banks have been raising their interest rates to consumers even as the BoE has been cutting official rates.

But King said when the BoE was last raising interest rates, those increases were not being fully passed on to customers, so in some way the lenders decision to not pass on cuts is "partly unwinding some of the excessive compression." The key difference between the new scheme and previous BoE efforts to ease the lending squeeze was the duration of the money on offer and the lack of one-off auctions, as the collateral requirements and haircuts remain the same.

King said that was to ensure that banks had access to liquidity whenever they needed it and for a longer period of time.

The BoE will announce the total amounts involved in the operation at the end of the six month window but will not detail how much individual banks have accessed.

King said the success of the scheme would be judged upon financial markets stabilizing over a prolonged period of time."

"The real test is we suddenly wake up and think that for the last two months no one is concerned about fragility in the banking system," he said.