UK Details $100 Billion Mortgage Plan

The Bank of England moved to ease the effects of a credit crunch on the UK's banking system on Monday by offering to swap secure government bonds for riskier mortgage debt.


It is initially offering 50 billion pounds worth ($100 billion) of gilt-edged securities but the size of the scheme will depend on how much banks need to get lending going again -- and how much they're willing to stump up in costly collateral.

"There is no arbitrary limit on it," Bank of England Governor Mervyn King told reporters.

Although the move should help to give some much-needed to support to the banking system, economists cautioned the swap scheme alone would not be enough to revive a flagging economy.

"It will have a positive impact on the money market but it's unlikely that it will have any meaningful impact on unlocking mortgage markets," said Lena Komileva, market economist at Tullett Prebon.

The BoE's plan is its latest move to deal with the impact of the credit crisis on the economy.

Central banks around the world have been taking a variety of actions to get the frozen markets moving.

The Federal Reserve last month unveiled a $200 billion scheme to help mortgage markets.

Since December the Bank of England has cut interest rates three times to 5.0 percent and provided emergency, mainly three month, liquidity to banks.

However, the government worries some of those rate cuts have not been passed on to consumers who, faced with rising oil and food prices and falling house prices, are starting to feel the effects of an economic downturn -- and who are increasingly disillusioned with Prime Minister Gordon Brown.

"We will make sure that there is enough liquidity in the economy so that we can continue to lend money for businesses and lend money for people to buy their own houses," Brown said.

No Reversal

Analysts said the plan could boost sentiment but would not reverse the impact of the credit squeeze.

"This is not going to undo the harm that's already been done to the economy," said Alan Clarke, an economist at BNP Paribas. "It might just stop things getting any worse."

Sterling fell after the well-flagged plan was unveiled, the interbank cost of borrowing three-month sterling funds fell modestly and one-month rates slipped to their lowest level in a year at 5.49000 percent.

King said it would be at least two months before it would be possible to judge whether the scheme has worked.

The Bank of England is offering to exchange government securities for a range of high quality bank assets, including mortgages.

It is being guaranteed by the British Treasury but has been designed to avoid the public sector taking on the risk of potential losses.

The BoE plan is designed to tackle an overhang of debt in the 1.2 trillion pounds UK mortgage market that banks would have repackaged and sold on had the credit crisis not hit.

Lehman Brothers estimates that overhang at around 35 billion pounds.

Banks are expected to take more action to shore up their own balance sheets in tandem with the BoE action.

"...If you look at what's been happening in the last few days, the pressure on banks to declare the extent of any losses they've made ... and how they are going to deal with it and how they are going to raise money from their shareholders -- I think you'll see much, much more of that," Finance Minister Alistair Darling said.

JPMorgan estimates the capital shortfall for the four large UK banks -- Royal Bank of Scotland, HBOS, Barclays and Lloyds TSB -- at nearly 37 billion pounds.

Royal Bank of Scotland, Britain's second largest bank, confirmed on Monday it was considering a share issue and others in the sector are expected to follow.

People familiar with the matter have told Reuters RBS is seeking to raise over $20 billion.