The sub-prime crisis has firmly moved to Europe with the Bank of England announcing it will bailout UK banks with loans of up to $104 billion.
However, some financial services analysts in the UK believe the bailout could reach up to $210 billion during the three-year loans period.
The bank has agreed to swap the bank and building societies’ mortgages and credit card loans for UK Treasury Bills.
Each swap will initially be for one year but could be extended up to three years while the risks and losses remain with the banks.
The assets being swapped had to exist at the end of 2007 and cannot be used for new financing of mortgages and credit card debit.
The move is to put liquidity back into the UK credit-financing sector due to financial institutions being unable to raise new loans, the bank said.
Bank of England governor Mervyn King said the new liquidity scheme was a bid to get lending markets in the UK moving again.
“The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remain with the banks,” he said.
“Banks will be able to enter into new asset swaps at any point during a six-month window from today.”
The scheme will close after three years, King confirmed, during which time the Bank of England expects confidence in lending markets will return.
The UK banks and building societies swapping assets will have to pay a fee based on the three month London interbank interest rate, which was 2.96 per cent for April.
The financial institutions will have to provide assets greater than the value of the treasury bonds, including AAA-rated mortgages as well as lower ranked securities.
The bank has said that if the value of the assets fell during the swap period the financial institutions would have to provide more assets.
King said the liquidity scheme is ‘ring-fenced’ from the bank’s money market operations so it won’t affect the Bank of England’s ability to implement monetary policy.
