BoE reveals £50 bln security swap program to revive bank lending

"There is no arbitrary limit on this so it could well go higher," King told reporters in London on Monday. He said the plan aims to restore confidence to the banking system and the most important aspect is that "everyone needs to know this is there for them to access as needed."

BoE's aim is to unblock the interbank lending market and restore normal lending practices to banks and home buyers hampered by the subprime credit crisis. The Bank of England is offering the swaps starting Monday and continuing for six months.

The asset swaps are for one year, but renewable for up to three years - and only for assets which existed at the end of last year, the central bank said. The risk of losses on the swapped assets remains with the commercial banks, not the taxpayers, the BoE said.

The measures, backed by Prime Minister Gordon Brown's government, mimic a swap of $200 billion of securities by the U.S. Federal Reserve last month as central banks around the world struggle to prop up financial markets. A surge in borrowing costs prompted U.K. banks to withdraw their best mortgage offers, threatening to exacerbate the worst housing downturn since 1992.

Banks will be able to swap a range of high-quality assets, including AAA-rated securities backed by UK and European residential mortgages for Treasury bills. Even though the assets have value, banks cant use them to raise money because such securities are tainted by the crisis over lower-quality securities backed by mortgages to people with weak credit.

"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," King was quoted as saying.

The swap gives the banks assets they can use to operate, in hopes they will then resume lending more - and support the housing market and the overall British economy.

BANK LOSSES
The swap is double the value of loans King extended in September to prop up Northern Rock Plc. The government in February nationalized the mortgage lender, the first U.K. bank to fall victim to the credit freeze. That stemmed from the collapse of the U.S. subprime market, which has now cost more than $250 billion in bank write-downs and credit losses.

"Given its scale, the scheme is indemnified by the Treasury, but is designed to avoid the public sector taking on the risk of potential losses," the Bank of England said.

"Banks will need, at all times, to provide the Bank of England with assets of significantly greater value than the Treasury bills they have received. If the value of those assets were to fall, the banks would need to provide more assets, or return some of the Treasury bills."

The Bank said the size of the liquidity injection would depend on market conditions, but it said the commercial banks suggested that they were likely to subscribe for about 50 billion pounds in swaps.

"This package may help ease money-market strains, and provide a welcome route to liquidity for some particular banks and building societies that otherwise may face extreme difficulties in obtaining funds," Michael Saunders, chief western European economist at Citigroup Inc, told Bloomberg News.

NOT ENOUGH TO REVIVE ECONOMY
British finance minister said this scheme will boost confidence in the market. "What we're doing is providing banks with things they can trade," Alistair Darling told Sky television.

"This in turn will restore confidence to the market and will begin to get us back into a situation where we see banks being able to lend to each other and therefore the money being available to lend to businesses and individuals."

The plan is a change of approach by the Bank of England after its interest-rate cuts failed to ease the logjam. The European Central Bank, the first central bank to react to the credit crisis in August, has extended the maturity of money auctions to help cash-strapped institutions.

Although the move should help to give some much-needed to support to the banking system, economists cautioned the swap scheme alone would not be enough to revive a flagging economy.

"It will have a positive impact on the money market but it's unlikely that it will have any meaningful impact on unlocking mortgage markets," said Lena Komileva, market economist at Tullett Prebon.