The Bank of England is offering to swap government bonds worth £50 billion for banks' riskier mortgage debt to try to ease the effects of a credit crunch on the banking system.

The central bank said yesterday it was offering to swap the gilt-edged government securities for a range of high quality bank assets, including mortgages. The asset swaps will be for one year and may be renewed for a total of three years, helping the banks - who are currently unable to shift the currently unattractive mortgage debt - with longer term assistance.

"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," BoE governor Mervyn King said in a statement.

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

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."

The global credit crunch that has followed a sharp downturn in the US subprime mortgage market has left British banks wary of lending to each other or offering new home loans despite three interest rate cuts by the BoE since December. In the US, the Federal Reserve last month took similar action with a £100 billion programme to boost liquidity in financial markets.

Yesterday's BoE move is aimed at freeing up bank balance sheets so companies can lend more to consumers who face declining house values, fewer mortgage options, and soaring oil and food prices.

In return, the government is expecting banks to take more action to shore up their own balance sheets.

"...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 yesterday.

Royal Bank of Scotland, Britain's second largest bank, confirmed yesterday 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.

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