Bank of England Denies Plans for Mortgage Bailout

March 24, 2008

The Bank of England denied a report in the Financial Times on Saturday that it was proposing using public funds to make mass purchases of mortgage-backed securities in order to ease the credit crisis.

“Central banks, including the Bank of England, have been looking at ways to ease the strain,” a BoE spokesman said. “The BoE is not, however, among those reported today to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk.”

“We can, however, confirm that we have been examining a number of other options. But it is too early to go into any detail,” the spokesman said.

The Financial Times said central banks on both sides of the Atlantic were in talks about the feasibility of buying up mortgage-backed securities as a way of ending the global credit crisis.

The newspaper, without citing sources, said the talks were at an early stage and part of a broader exchange on how to battle the turmoil in financial markets, which has continued despite the injection by central banks of billions of dollars of liquidity and cuts in interest rates.

It said the Bank of England appeared to be most enthusiastic to explore the idea, which would involve the use of public money to shore up the market in a key financial instrument.

The Federal Reserve was open to the idea in principle, but only as a last resort, while the European Central Bank (ECB) was less keen, it said.

Britain’s finance ministry also declined to comment. The ECB and Federal Reserve could not immediately be reached.

Central banks have so far been prepared to lend against mortgage backed securities, which have fallen in value amid a credit squeeze which was sparked by low quality mortgages in the United States, leading to a vicious circle of forced sales, falling prices and weakening balance sheets for banks.

Banks have written down over $125 billion of assets since November, hammering their shares.

The DJ Stoxx European banks index has fallen almost 40 percent since June.

Governments and central banks have made repeated attempts to restore order. Britain has nationalized struggling mortgage bank Northern Rock, Germany is overseeing the rescue of lender IKB and the United States is presiding over a rescue of Bear Stearns.
But markets remain jittery, with Credit Suisse warning on Thursday it could report its first quarterly loss in five years and credit ratings agency S&P saying on Friday it was cutting its view on U.S. banks Goldman Sachs and Lehman Brothers to “negative” from “stable”.

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