Page last updated at 21:49 GMT, Wednesday, 16 April 2008 22:49 UK

Government plans to help UK banks

By Stephanie Flanders
BBC economics editor

Man carrying For Sale sign
The housing market has been hit falling numbers of available mortgages

The Bank of England is poised to launch a new lending programme for UK banks in an effort to break the logjam in the credit market, the BBC has learned.

Final details are still being worked out, including the scale of the plan and the exact terms.

But it will be similar to moves in the US, will be backed by the Treasury and could be launched as soon as next week.

The scheme would temporarily allow banks to swap their mortgage-based assets for government bonds.

The hope is that banks will find it easier to borrow and lend to other banks using these bonds as security, which in turn would ease up lending to individual borrowers.

The government is going down the disastrous road of bailing out the banks and leaving the taxpayer with the liabilities,
Vince Cable, Liberal Democrats

The government does not consider this a bail-out of the banks and the BBC understands the scheme will not go ahead unless it can be designed to protect the taxpayer from any loss.

One safeguard will come from exchanging the mortgage-backed assets at less than their market value.

Banks are likely to welcome the plan, though it would need to be on a larger scale than previous efforts if it is to make a significant difference.

Taxpayer risk

Vince Cable, deputy leader of the Liberal Democrats, acknowledged the need for action but said the taxpayer should not take on the risks and losses of the banks.

"We need to see the small print of what's being proposed," he said.

He said banks' mortgage-based assets are being exchanged for safer government debt, therefore the government is taking the banks' risks onto its balance sheet.

"I am very concerned that in addition to all the costs associated with Northern Rock, the government is going down the disastrous road of bailing out the banks and leaving the taxpayer with the liabilities."

On Tuesday, Gordon Brown met leading UK bankers, who urged the government to intervene in the money markets.

British mortgage lenders have warned that lending could halve this year unless more action was taken by the government.

The rate at which banks lend to each other has been rising, which has meant that banks are toughening up their lending terms even though official interest rates are falling.


Shadow Chancellor George Osbourne on the government bond proposal

Mr Brown, in the United States, said earlier the government was looking at ways to inject liquidity into money markets on a sustained basis.

Labour MP John McFall, the chairman of the House of Commons Treasury select committee, told the BBC people would see the government's plans as a bailing out of the private sector. He said: "I would have liked to have see the market work. I would have liked to have seen the banks having enough confidence to lend to one another."

"But given this paralysis that's occurring - what initiative can the government and the Bank of England and others undertake? "

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