THE BANK of England has said that it is in discussions with other central banks about how to "ease the strains" in the financial markets, although it is not considering requiring British taxpayers to assume credit risks.
Britain's central bank said it was "not among" those that the Financial Times reported this weekend were contemplating the purchase of mortgage-backed securities to smooth lending to consumers after a worldwide surge in borrowing costs. The US Federal Reserve also denied that it was in discussions to buy such debt.
"We have been examining a number of other options, but it is too early to go into any detail," the Bank of England said in a statement. "The bank is not among those reported to be proposing schemes that would require the taxpayer rather than banks to assume the credit risk."
Financial institutions have criticised the Bank of England for not doing enough to ease conditions in money markets. Bank of England governor Mervyn King offered an extra £5 billion (€6.4 billion) in loans to banks last Thursday, the first move of its kind in six months, to push the cost of borrowing by banks closer to the 5.25 per cent benchmark rate. Mr King will discuss his strategy in a parliamentary hearing on Wednesday.
London's interbank offered rate, or Libor, for three-month loans in pounds climbed to 5.99 per cent after the bank's injection of funds, the highest since December, when the collapse of the subprime mortgage market in the US made banks reluctant to lend to each other.
The surge in credit costs has choked off lending to consumers in Britain, especially for new home loans. Banks including Alliance & Leicester, Bradford & Bingley and HBOS have withdrawn loan offers and raised the cost of borrowing in recent weeks.
Mortgage lending fell to £24 billion last month, 7 per cent less than January and 31 per cent less than June 2007, just before the credit crunch started. British house prices, which tripled in the last decade as banks made credit more affordable, have fallen in each of the past four months, the longest run since 2000, according to Nationwide Building Society.
The Financial Times reported on Saturday that policymakers were discussing whether to purchase mortgage-backed securities as a way to restore confidence to the system and ensure funding for new loans. The paper, without saying where it got the information, said that Britain's central bank was "most enthusiastic", while the US Federal Reserve saw the plan as a "last resort" and the European Central Bank was "least enthusiastic".
A Fed official subsequently denied that it was in talks about buying mortgage-backed debt. The Fed has already taken steps to stabilise the market for mortgage-backed securities and provide liquidity to financial institutions.
The Bank of England's statement suggests that the British government is in step with the US administration in attempting to avoid any plan which would risk taxpayer funds.
Tim Bond, head of asset allocation at Barclays Capital, said that British policymakers should copy the Fed's programme to inject liquidity into financial markets.
"The Bank of England does not provide the same comprehensive liquidity framework that the Fed has just put in place and such as exists already at the ECB," Mr Bond said. "We need them to provide liquidity to any duration. It would deter the raiders." - ( Bloomberg )
