Bank of England to Allow Banks to Trade Mortgage-Backed Securities for Government Bonds
- Apr 21, 2008
London–To soothe the British financial markets, the Bank of England announced Monday that it would let banks exchange mortgage-backed securities valued at about $100 billion for government bonds, the New York Times said.Banks will deposit the securities–which have become hard to sell since credit markets began contracting last summer–in the central bank as collateral at a discount. To increase lending among banks, they in exchange will receive easy-to-trade government bonds.If the securities drop in value, the banks will have to weather the loss; however, there is no “arbitrary limit” on how much can be lent. Banks had suggested previously that they might need £50 billion, or $100 billion.Asset swaps–available only for assets that existed at the end of last year–will be for one year and can be renewed for up to three. Several British banks have said they will reduce real estate lending exposure; with prices declining, few are likely to reconsider, according to the Times.