Page last updated at 18:18 GMT, Monday, 21 April 2008 19:18 UK

Darling backs 50bn bank bailout

Alistair Darling's Commons statement on the 50bn plan to ease the credit crisis

Chancellor Alistair Darling has backed the Bank of England's 50bn plan to help prevent the credit crisis causing more damage to the UK banking system.

Under the scheme, banks will be able to swap potentially risky mortgage debts for secure government bonds to help them operate during the credit squeeze.

Mr Darling said it would "help resolve" problems in credit markets and make life easier for would-be borrowers.

The UK's financial system remained "fundamentally strong", he argued.

In a statement to MPs, Mr Darling said the Bank's intervention was necessary because money markets were not "functioning properly" and were beset by a "lack of confidence" despite billions of pounds in liquidity being pumped into the system.

This is a banking market bail-out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that
Robert Peston, BBC business editor

The measures, he said, would help alleviate the "increasing cost and declining availability of lending by banks and building societies".

Abbey, one of the UK's largest lenders, reacted by instantly cutting the cost of some mortgage deals, albeit by a very small amount.

But one housing expert said the package would only have a "marginal" influence, at best, on current mortgage rates.

"It is pretty small beer," said Simon Rubinsohn, chief economist for the Royal Institution of Chartered Surveyors. "It is not a short-term fix for the housing market."

Swap scheme

Under the scheme, banks will be allowed to swap mortgage debts for government securities.

The swap scheme, starting on Monday, will be for a period of one year and may be renewed for a total of three years.

It will only apply to mortgage debts on banks' books at the end of 2007 and the swaps cannot be used to finance new lending.

The central bank anticipates that initial take-up of the scheme will total 50bn but there is no cap on lending.

Mr Darling denied the support was a bailout, stressing that the risk of losses remained with the banks which will be required to pay a fee for the swap facility and provide the Bank of England with assets of greater value than the government bonds they will receive.

The chancellor also called on banks to be honest about the true scale of their current losses, saying "transparency was an essential part of stabilising financial markets".

Barclays office
We are very supportive of this development
John Varley, Barclays chief executive

Despite "broadly" welcoming the plan, shadow chancellor George Osborne called for a "personal guarantee" from the chancellor that no taxpayers would lose out as a result.

Vince Cable, the Liberal Democrats' Treasury spokesman, said he had reservations about the idea, saying it "should be linked to changes in the banks' behaviour".

Prime Minister Gordon Brown said the scheme was one of a range of measures to protect British workers from the turbulence in America's financial and housing markets.

Banks welcomed the move and said they were confident it would go some way to free up credit markets.

"We are very supportive of this development," said Barclays chief executive John Varley. "It is both innovative and substantive."

But John McFall, chairman of the Commons Treasury Select Committee, said it would be "silly" to think Monday's move would serve as a panacea for the current financial distress.

"This is a stimulus but there are tough times ahead over the next year or two economically and you can't get away from it," he told the BBC.

Beneficial effects

British banks have become increasingly unwilling to make loans, even to each other, as a result of the credit crisis, which was triggered by massive losses for banks involved in the US sub-prime mortgage market.

And many investors, concerned at what happened to sub-prime mortgages in the US, no longer want UK mortgage-based assets.

Robert Peston explains the implications of the Bank of England's move

The disappearance of this market has deprived banks of tens of billions of pounds of finance for mortgage lending.

Although it will not directly support new lending, the greater liquidity should free up bank balance sheets and enable them to lend more to consumers, home buyers and businesses.

However, the Council of Mortgage Lenders - which is meeting with Mr Darling tomorrow to discuss ways of helping borrowers - said that the liquidity boost would not automatically reverse the recent trend for higher mortgage costs.

"Further details are... awaited on how much of the additional liquidity might be recycled responsibly into mortgage products or pricing," it said.

Bail-out?

The BBC's business editor Robert Peston said the primary purpose of the scheme was to prevent another Northern Rock, not to try and bring down mortgage rates.

"Or to put it another way, taxpayer support is being provided to minimise the risk of huge future losses for taxpayers from another banking collapse."

"This is a banking market bail-out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that," he said.

Until now, the Bank of England has been more conservative in its financial support for banks than the Federal Reserve in the US and the European Central Bank.

In the US, the Federal Reserve took similar action with a $200bn programme to boost liquidity in financial markets last month.


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