Bank of England to Detail Swap Plan for Easing Credit

Bank of England to Detail Swap Plan for Easing Credit

April 20 (Bloomberg) -- The Bank of England tomorrow will release its plan to swap government bonds for mortgage-backed securities in an effort to ease credit costs and help British homeowners, Chancellor of the Exchequer Alistair Darling said.

This will ``unfreeze the situation we've got at the moment,'' Darling said today in a BBC television interview. ``What the Bank of England will do is in effect lend the banks that money. In the meantime, the Bank of England will take a security,'' he said.

Prime Minister Gordon Brown's government is looking for ways to promote lending after a surge in borrowing costs has caused a pullback by banks. Companies including HBOS Plc have curbed lending and raised the cost of mortgage loans even after central bank policy makers cut the benchmark lending rate three times since December to help avert a U.K. recession.

By offering commercial lenders government bonds, the central bank will be adding to their inventory of liquid assets and making it easier for them to both raise cash and lend, especially to consumers seeking mortgages. In return, the government will hold the riskier mortgage-backed assets as security.

The central bank and the Treasury may offer a swap of 50 billion pounds ($100 billion), the British Broadcasting Corp. reported yesterday. Former Bank of England policy maker Willem Buiter said that may not be enough. The authorities may need to provide double that amount to kick-start the mortgage market, he said in an interview.

Stabilizing Markets

``This is an essential initial step in trying to get the financial market stabilized and that in turn will help the mortgage market,'' Darling said today. ``We can re-open the financial markets, because that is an essential pre-condition for the provision of mortgages.''

Darling, who didn't specify the size of the program in the interview, said he wants British banks to be as transparent as possible in declaring losses on bad loans. He also urged them to pass on interest rate cuts to consumers.

A Bank of England spokesman declined to comment on Darling's remarks when contacted today by Bloomberg News.

``It's important the banks begin now to expose the extent of their losses and explain now how they are going to rebuild their capital,'' he said.

Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, is considering a share sale to shore up capital depleted by credit-related writedowns and its part in the acquisition of ABN Amro Holding NV last year, according to a person with knowledge of the plan.

``I would like to see banks do more to pass on the interest rate cuts,'' Darling said.

At the same time, the finance minister urged patience, saying the credit crunch partly needs time to work itself out.

``One analogy is someone who has gotten dose of food poisoning and in some aspects that just has to work its way through the system,'' he said. ``We can help the process and the Bank of England's measures tomorrow will help the process, which in turn will help the housing market.''

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