CENTRAL BANKS on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis.

Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.

The conversations, part of a broader exchange as to possible future steps in battling financial turmoil, are at an early stage. However, the fact that such a move is being discussed at all indicates the depth of concern which exists over the health of the banking system.

It shows how far the policy debate has shifted in recent weeks as the crisis spread to prime mortgage assets in the US and engulfed Bear Stearns, the investment bank.

The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic.

Any move to buy mortgage-backed securities would require government involvement because taxpayers would be assuming credit risk. There is no indication as yet that the US administration would favour such moves. In the euro zone it would require agreement from 15 governments.

One argument among policymakers and bankers has been that new international rules have exacerbated the credit squeeze by requiring assets to be valued at their current record lows rather than at face value.

If public authorities were to buy and hold sufficient mortgage-backed securities at prices well below face value, but above current prices, they would set a floor on the MBS market.

The Fed does not believe that the point has yet been reached where such action is needed and it considers the discussions it has had with its counterparts as "blue-sky thinking" rather than the formulation of a definitive policy proposal.

Fed officials are monitoring the impact of their latest liquidity moves and interest-rate cuts. They take the view that the US has not exhausted all the options short of wholesale public intervention and feel further intermediate steps are available to them, such as using the Fed's balance sheet to boost liquidity in the markets.