Following is the statement from the Bank of England on the ground-breaking plan announced on Monday to lend banks around 50 billion pounds to help them operate during the credit squeeze.

The plan will allow banks to swap mortgage-backed bonds, which have become hard to trade, for Treasury bills. This would free up banks' balance sheets, enabling them to lend more to households.

SPECIAL LIQUIDITY SCHEME

"The Bank of England is today launching a scheme to allow banks to swap temporarily their high quality mortgage-backed and other securities for UK Treasury Bills.

With markets for many securities currently closed, banks have on their balance sheets an 'overhang' of these assets, which they cannot sell or pledge as security to raise funds. Their financial position has been stretched by this overhang so banks have been reluctant to make new loans, even to each other.

Under the Scheme, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks. By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets.

The scheme has three key features:

The asset swaps will be for long terms. Each swap will be for a period of 1 year and may be renewed for a total of up to 3 years. The risk of losses on their loans remains with the banks. The swaps are available only for assets existing at the end of 2007 and cannot be used to finance new lending. Mervyn King, Governor of the Bank of England, said "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 remains with the banks."

Banks will be able to enter into new asset swaps at any point during a six-month window, starting today. Those swaps will be for a term of one year. Banks will be able, at the discretion of the Bank of England, to renew them each year for, at most, a total of three years. After that, the scheme will close. The length of these transactions will provide banks with the certainty about liquidity that is needed to boost confidence. During the lifetime of an asset swap, banks will be required to pay a fee based on the 3-month London interbank interest rate (Libor).