Bank of England Offers Securities Swap

The Bank of England unveiled a plan to let banks temporarily exchange high-quality mortgage-backed and other securities for U.K. Treasury bills.

In a statement Monday, Britain's central bank said talks with private banks suggest the program will initially be worth around 50 billion pounds, or roughly $100 billion.

"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," the Bank of England said. "Their financial position has been stretched by this overhang so banks have been reluctant to make new loans, even to each other."

The proposal will allow banks to swap illiquid assets of sufficiently high quality for Treasury bills, but the responsibility for losses on the loans will stay with the banks. Each swap will be for one year and may be renewed for up to three years. Additionally, the exchange will apply only to assets that existed at the end of 2007 and can't be used to finance new lending.

"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," said Mervyn King, governor of the Bank of England, in a statement.

Similarly, the Federal Reserve in the U.S. has a program that allows banks to temporarily exchange certain high quality but hard-to-trade securities for Treasury debt.