UK unveils £50 billion credit crunch plan for banks

The Bank of England unveiled an ambitious plan yesterday to swap banks' risky mortgage assets for at least £50 billion of government debt in the latest bid to spare Britain from the ravages of a global credit crunch.

Central banks everywhere have been desperately trying to get confidence back into markets, but despite eight months passing and billions spent, banks remain afraid to lend money because they don't know each others' exposure to bad US home loans.

In Britain, the credit crunch has already taken down Northern Rock bank and concern is building over the financial system and the economy as new buyers are shut out of the housing market by cash-strapped lenders restricting mortgages.

Prime Minister Gordon Brown, whose popularity has slumped as voters lose faith in his handling of the economy, has made ending the credit crunch a priority, particularly as fears of a real estate crash have shot up in recent weeks.

His finance minister Alistair Darling said he would meet lenders today to get them to do their bit - pass on interest rate cuts and help people refinance their mortgages.

Speaking to reporters after the plan was announced, BoE Governor Mervyn King said the Special Liquidity Scheme (SLS) would not make things better overnight but would at least give banks access to a greater pool of cash.

The £50 billion was just a start and there was no arbitrary limit, he said.

"What we have to do is to create an environment in which a bank knows that not only it, but other banks, can come to the Bank of England and exchange their illiquid assets for liquid assets," he said. "It is restoring confidence in banks being able to deal with each other that is key in this."

Interbank lending rates fell modestly yesterday after the plan was announced, but are still some way higher than the BoE's main lending rate. Bank stocks, meanwhile, led the FTSE-100 index of leading shares lower.

Analysts remain sceptical about whether the scheme will be enough to prompt the economic rebound the government desperately needs. Bookmakers have now made the opposition Conservatives the hot favourite to win the next election, which must take place before May 2010.

We still have doubts over the extent to which the scheme can address the fundamental problems in the housing market and wider economy," said Jonathan Loynes of Capital Economics.

Under the scheme, banks can get one-year government bills for highly rated mortgage debt which can then be rolled over the at the central bank's discretion for up to three years. The six-month window for the plan opened yesterday.