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Bank of England Seeks to Ease `Strains' in Markets (Update2)
By Reed V. Landberg
March 22 (Bloomberg) -- The Bank of England said it's in discussions with other central banks about how to ``ease the strains'' in financial markets, although it's not considering requiring taxpayers to assume credit risks.
Britain's central bank said it is ``not among'' those that the Financial Times reported earlier today were contemplating the purchase of mortgage-backed securities to smooth lending to consumers after a worldwide surge in borrowing costs. The Federal Reserve also denied it's in discussions to buy such debt.
``We have been examining a number of other options, but it is too early to go into any detail,'' the London-based Bank of England said in a statement. ``The bank is not among those reported today to be proposing schemes that would require the taxpayer rather than banks to assume the credit risk.''
Financial institutions have criticized the Bank of England for not doing enough to ease conditions in money markets. Bank of England Governor Mervyn King offered an extra 5 billion pounds ($9.9 billion) in loans to banks on March 20, the first move of its kind in six months to push the cost of borrowing by banks closer to the 5.25 percent benchmark rate. King will discuss his strategy in a hearing with lawmakers in Parliament on March 26.
London's interbank offered rate, or Libor, for three-month loans in pounds, climbed to 5.99 percent on March 20, the highest since December after the collapse of the subprime mortgage market in the U.S. made banks reluctant to lend to each other.
Mortgage Lending
The surge in credit costs has choked off lending to consumers in the U.K., especially for new home loans. Banks including Alliance & Leicester Plc, Bradford & Bingley Plc and HBOS Plc Scotland have withdrawn loan offers and raised the cost of borrowing in recent weeks.
``Demand for mortgages remains strong but cannot be fully met from existing funding,'' Michael Coogan, director general of the Council of Mortgage Lenders, said in a statement on March 20. ``Many lenders have had to reduce their product ranges, increase their mortgage prices and, in some cases, to reduce their lending.''
Mortgage lending fell to 24 billion pounds last month, 7 percent less than January and 31 percent below the level in June 2007, just before the credit crunch started. House prices, which tripled in the last decade as banks made credit more affordable, have fallen in each of the past four months, the longest streak since 2000, according to Nationwide Building Society.
The Financial Times reported today that policy makers were discussing whether to purchase mortgage-backed securities as a way to restore confidence to the system and ensure funding for new loans.
Federal Reserve Denial
The paper, without saying where it got the information, said the U.K. central bank was ``most enthusiastic'' while the U.S. Federal Reserve saw the plan as a ``last resort'' and the European Central Bank was ``least enthusiastic.''
A Federal Reserve official denied to Bloomberg News today that the U.S. central bank is in talks about buying mortgage- backed debt. The Federal Reserve has already taken steps to stabilize the market for mortgage-backed securities and provide liquidity to financial institutions.
The Bank of England's statement suggests the British government is in step with U.S. President George W. Bush's administration in attempting to avoid any plan that would risk taxpayer funds. U.K. authorities last month nationalized mortgage lender Northern Rock Plc.
Tim Bond, head of asset allocation at Barclays Capital, said that U.K. policy makers should copy the Fed's program to inject liquidity into financial markets.
Liquidity Sought
``The Bank of England does not provide the same comprehensive liquidity framework that the Fed has just put in place and such as exists already at the ECB,'' Bond told journalists in London on March 20. ``We need them to provide liquidity to any duration. It would deter the raiders.''
The Fed slashed its benchmark lending rate three-quarters of a point to 2.25 percent on March 18 and implemented a program to swap $200 billion in Treasuries for mortgage-backed securities. The ECB loaned 15 billion euros ($23.2 billion) of funds to meet demand for more cash before the Easter weekend.
The Bank of England lowered its benchmark rate a quarter point in February to 5.25 percent, the second cut of that size in three months.
King, who met with banking industry executives in London on March 20, already has said he's considering making changes to the way policy makers conduct open market operations. The central bank's nine-member Monetary Policy Committee next decides on interest rates on April 10.
Lehman Brothers Holdings Inc. and Barclays Plc were among the banks bringing forward their forecasts for a Bank of England rate cut as early as next month.
To contact the reporters on this story: Reed Landberg in London at
landberg@bloomberg.net
Last Updated: March 22, 2008 12:51 EDT
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