Page last updated at 17:09 GMT, Thursday, 17 April 2008 18:09 UK

Cautious welcome for bank plans

Bank of England
The Bank of England plan is similar to one seen in the US

A government plan to ease the log-jam in the mortgage market has received a guarded welcome.

The BBC has learned that the Bank of England is working on a lending programme that could make it easier for banks to lend to each other.

The plan to swap mortgage-based assets for government bonds was backed by the Conservatives and some brokers.

But the Liberal Democrats warned that bailing out the banks could leave taxpayers with the liabilities.

Work in progress

Ministers and civil servants are working on the details of the government plan, which could be launched as early as next week.

We welcome any indication of a change of tack
Council of Mortgage Lenders

It is similar to a move in the US, and would see a temporary swap of the mortgage-based assets for the bonds.

The aim is that the 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 BBC understands the scheme will not go ahead unless it can be designed to protect the taxpayer from any loss.

Brokers' joy

The industry has welcomed the move, although is keen to see the finer details of the proposal.

Simon Tyler, of Chase de Vere Mortgage Management, said that there was a 50bn-70bn undersupply of funds, which meant lenders were raising rates on mortgage deals.

Sold sign
The number of mortgage deals available has been slashed

"Certainly anything that's going to provide some sort of way in which the banks can start to lend to each other and move the machine forward is going to be massively welcomed," he said.

Michael Bolton, chief executive of mortgage specialist Edeus, said the current situation was "the worst banking crisis for 80 years".

But he said the planned move would allow lenders to shore up their balance sheets, rather than pass on the effects to householders in cheaper mortgage deals.

"There real shame is that if we had acted in September or October we probably could have pre-empted a rapid deterioration in arrears and repossession statistics," he said.

The Council of Mortgage Lenders (CML) said it "welcomed any indication of a change of tack" but would not comment further until it had seen published details.

A spokeswoman said the CML had been calling for more funding with longer maturity periods.

Political views

Shadow chancellor George Osborne told BBC Breakfast that the action should be taken quickly.

Shadow Chancellor George Osbourne on the government bond proposal

"There are thousands of people facing the prospect of real hardship because they cannot find mortgage deals to re-mortgage onto, so unblocking the financial system I think is a very important step," he said.

"If the government comes forward with a sensible idea, and I'd urge them to get on with it because after all we've been dealing with this problem now for months and the dithering is not helping anyone, then we will support it."

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.

"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," he said.

Bank shares initially reacted positively to the news and rose on Thursday, but gains were largely erased by the close of trade as negative sentiment took over.

Of the biggest lenders, Bradford and Bingley (up 0.87%), Alliance and Leicester (up 1.37%), HBOS (up 1.95%), and Lloyds TSB (up 0.23%) ended higher, while Barclays fell 0.23% and Royal Bank of Scotland declined 2.4%.

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