LONDON (Reuters) - The Bank of England detailed a ground-breaking plan on Monday to lend banks around 50 billion pounds to help them operate during the credit squeeze.
It said it would allow banks to swap mortgage-backed bonds which have become hard to trade for specially-issued Treasury bills.
This would free up banks’ balance sheets, allowing them to lend more to households facing a dwindling choice of mortgage options and declining property values.
Here are the key points of the plan:
* 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. A fee based on three-month London interbank interest rates will be required.
* The swaps are available only for assets existing at the end of 2007 and cannot be used to finance new lending. Banks can benefit from the scheme during a six-month window starting Monday.
* The BoE will value eligible securities using observed market prices and reserves the right to use its own calculations if market prices are unavailable. In that case, a 5 percentage point will apply.
* An additional 3 percentage points will be added to haircuts to allow for currency risk when securities are not in sterling.
* An additional 5 percentage points will be applied to own-name eligible covered bonds, mortgage-backed securities and credit cards asset backed securities.
* The BoE a range of high quality assets in the scheme including AAA-rated securities backed by UK and European residential mortgages.
* The scheme will be guaranteed by the Treasury but is designed to avoid the taxpayer taking on risk.
* Banks will need to up their collateral if assets they have provided fall in value.
* Full details of haircuts can be found in the annex notes of this BoE release:
BoE Governor Mervyn King 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.”