BoE outlines £50bn asset swap scheme

by Gill Montia

Story link: BoE outlines £50bn asset swap scheme

The Bank of England has confirmed details of its £50 billion package to aid the UK’s banking industry.

The scheme aims to restore confidence in the markets and encourage banks to lend to one another.

It will allow banks to swap mortgage-backed assets, which have effectively become non-tradable since the onset of the US sub-prime mortgage crisis, for Treasury bonds that can be used to raise money.

Swaps will be for a period of one year, although renewable for up to three years.

Participants will pay a fee, based on the three-month London interbank interest rate, for the period of the swap.

The scheme will not take responsibility for banks’ losses from the credit crisis and only applies to assets held before the beginning of this year, meaning it cannot be used to finance new lending.

Banks will be required to provide the Bank of England with assets of higher value than the bonds they receive and should the assets fall in value during the swap period, banks will need to replace them.

It is understood that the value of bonds issued will be discounted by between 10% and 30% of the value of a bank’s assets.

There is no upper-limit on the asset swap arrangement, which could be extended on a discretionary basis.