Bank of England Set to Rescue Loan Markets

Radical new plans have been drawn up to aid banks and building societies which are suffering the most during the current credit crisis. Chancellor of the Exchequer, Alastair Darling has set in motion plans for The Bank of England to absorb billions of mortgage-backed assets, which the banks and building societies can then pay back over a 3 month period. The proposed action will be co-ordinated in conjunction with similar efforts which are being made by financial authorities in the US.

Less risky mortgage-backed securities have already been absorbed by The Bank of England in attempts to control the crunch that is being felt by British banks. However, these new plans are far more drastic and serve to underline the seriousness of the damage the rest of the economy could now face.

In two months it will be a year since the credit crunch began, but still the banks are reluctant to lend to each other and consumers are feeling the strain. In an article on the guardian website it was posited that: “Mervyn King, the Bank's governor, is expected to cave in to demands from the troubled lenders in the coming days, and offer them longer-term loans to ease their cash-flow problems. But Darling has become increasingly alarmed about the potential knock-on effects across the rest of Britain's debt-laden economy.”

Both UK and US financial leaders are discussing the feasibility of helping banks by taking on huge amounts of mortgage- backed assets. The UK government and US officials both agree that they must synchronise their actions to reduce the chances of multi-national banks moving their assets to London and treating the new plans as a get-out-of-jail-free card. Alastair Darling will fly to Washington soon to discuss options.

Darling is also pushing for banks to be more honest about the damage caused by their exposure to sub-prime mortgages so that the problem can be fully assessed and dealt with openly. In a guardian article a Treasury spokesperson said: “We're very keen to see real progress in Washington. It's important that the authorities in all countries commit to an action plan.”

In another effort to ease the financial crisis The Bank of England are also lowering interest rates this week to give homeowners some breathing space. Experts are saying that the base rate will be lowered by 5 %. However, experts are also questioning whether or not any savings would be passed on to customers as a direct result of the action, as mortgage companies are as strapped-for-cash as consumers are.

Speculation over alternative plans to help control the credit crisis include banks setting up their own structures to hold the bad assets, and then bringing in third-party investors such as hedge funds to invest in the structures. In an article published online by The Wall Street Journal it was noted that a Swiss bank called UBS AG has written down $38 billion in bad assets and has set up a structure to hold these bad assets separate from the rest of the bank. Only time will tell if the plans the Treasury have in mind will benefit the global economy and restore solidity to the loan markets.