Bank of England in £50bn bail-out

The Bank of England's £50bn Special Liquidity Scheme won't please taxpayers, but it looks like a necessary evil.

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Last Updated: 31 Aug 2010

The central bank has announced it will allow the UK’s banks to swap risky mortgage debts for government-backed bonds, in a bid to improve liquidity in the banking system and increase confidence in the mortgage lending market, which has virtually ground to a halt in the wake of the credit crisis. Indeed, such is the scale of the current problem that even David Cameron is saying it’s the right move.

The central bank’s £50bn bail out is its biggest-ever injection into the markets, and is a bid to help prevent the credit crisis causing more damage to UK economy. The bad news: taxpayers are liable.

Critics have argued that the Bank is bailing out the country’s banks at the taxpayers’ expense, effectively nationalising the banks’ losses. Indeed, the Bank can expect many taxpayers to feel put out by the risk – especially those who claim to have been too financially savvy to enter into such risky mortgage agreements in the first place. Taxpayers are in fact backing the prevention of another Northern Rock style collapse – which would end up leaving us all shelling out even more.

Each swap will only apply to mortgage debts on the banks’ books at the end of 2007, and the swaps can’t be used to finance new lending. They will last one year and may be renewed for up to three. The Bank has insisted that the risk to taxpayers will be negligible, pointing out that only top-rated assets will be accepted. The banks will also be charged a fee to use the scheme, and will have to take a discount of between 10% and 30% on the assets they swap, known as a ‘haircut’ in the business.

The plan respresents a u-turn for Mervyn King. The Bank of England chief has always insisted on banks shouldering the responsibility, while this in fact bears all the hallmarks of Gordon Brown’s time as chancellor. Perhaps the old hand has been at it again. Which just goes to show, while the PM may lack the image-building skills, he’s still canny when it comes to numbers.

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