PARIS: The British monetary authorities plan to inject liquidity into the countrys banks as they seek to restore health to financial institutions battered by the credit crisis.
Under the plan, scheduled to be announced Monday, the Bank of England will exchange government bonds for mortgage-backed securities, Alistair Darling, the chancellor of the Exchequer, said Sunday on BBC television.
“We recognize that this is an unprecedented shock to the system,” Darling said of the problems affecting the credit markets. “We havent seen this in generations. Its happening in America, Europe, the Far East. It is affecting countries all over the world. Were determined to do everything we can to get normality here.”
Darling said the central bank would “effectively lend the banks money to unfreeze the situation weve got at the moment.” Financial markets have ground to a halt, he said, because banks do not know the exposure that other banks might have to the U.S. subprime mortgage market and to other risky assets.
“What were doing is were trying to unbung that situation,” Darling said.
He did not say how much money would be involved or how the mortgage securities would be valued. British press reports said that the central bank would make available government bonds worth 50 billion to 100 billion, or $100 billion to $200 billion. A Bank of England spokesman declined to comment.
Because the government bonds are almost risk-free, they are easy to trade, and banks will presumably be more willing to lend to one another. The central bank will hold the illiquid mortgage assets as collateral.
Darling denied that the government was taking on any risk. “Its not giving the banks money, its lending the money to the banks,” he said. “If that does not happen, I think there is every chance the situation will get worse.”
Willem Buiter, a former Bank of England policy maker, told Bloomberg News that a significant amount of money would be needed to get the system working. “If they do 5 billion its not going to do much,” he said. “If they do 55 billion it would help deal with the overhang of illiquid mortgage-backed securities that mortgage lenders have on their balance sheets that prevents them from engaging in any new lending.”
Despite three interest rate cuts that have taken the Bank of Englands benchmark rate to 5 percent, the three-month London interbank sterling rate, a reference rate for loans between banks, was at nearly 5.9 percent Friday, indicating that banks remain nervous about their peers.
With Prime Minister Gordon Brown and his Labour Party facing difficult local elections in May, he and Darling are under pressure to help restore calm to financial markets.
The British plan follows a similar initiative announced last month by the U.S. Federal Reserve, which said that it would swap up to $200 billion of U.S. government bonds for mortgage-backed securities. Brown met Friday in Washington with the Fed chairman, Ben Bernanke, and other officials.
Darlings announcement came amid press reports that Royal Bank of Scotland, the second-largest British lender after HSBC, was preparing to announce a loss of 5 billion to 7 billion, and would seek to raise as much as 10 billion to 12 billion to restore its capital.
Fiona MacRae, a Royal Bank of Scotland spokeswoman, said that the bank had noted “recent speculation about a possible rights issue,” and that it would be updating investors on its trading performance and capital situation this week. She declined to comment further.
Global banks have had losses and write-downs totaling $200 billion since the collapse last summer of the market in securities based on subprime U.S. mortgages. The International Monetary Fund has estimated that the total cost of the credit crisis could reach $1 trillion.
April 21st, 2008 by 
admin
No Comments »