Government to Help UK Banks

The Bank of England is setting up a programme to help out the UK banks struggling with the credit crunch. The hope is this help will allow the mortgages taken off the market to go back on for consumers or at least to help lower the high interest rates the consumers are not being given. The plan is to swap the mortgage bases assets for government bonds. So will this really be a good thing? Some individuals believe this plan is actually going to target the taxes making it a higher cost on certain items. The theory is that none of the tax payers will have to fund the new programme.

The treasury is putting up the money for the Bank to help them provide the government bonds to the other banks. The banks are supposed to exchange their mortgage assets, but they want the taxpayer to be protected from any loss in those assets. The best way for this to happen is by offering the government bonds at a discount market value in order for the banks to come out ahead of the game and so the Treasury doesn’t lose too much in the scheme.

The government is trying to reassure the sceptics that they will not move ahead on the plan until they are completely satisfied with the way it should go. But some questions still remain like whether the change with the banks will make it easier for mortgage lending. Up until now the mortgage industry has taken away a great deal of their products because of the affordability. The new plan is supposed to help the mortgage products back on to the market. This means the banks should have products for businesses, first time home owners, and many more.

The other idea is that the banks should become more inclined to lend to each other so that they will pay less for the mortgage products they are selling to borrowers. It should make it easier for the banks to borrow more money. This would hopefully mean that the UK consumers would get a chance to see some of the benefits of lower rates as well.

The government isn’t considering this move a bailout. They are just trying to fix the problems in the mortgage industry from failing again or being in this holding pattern for any more time. A bailout is considered when the government just gets rid of the assets for the banks. In this case they are actually trading one product for another. It is a loan to help the banking sector get back on its feet.

Questions have arisen as to why the government is creating such a plan now. The fact is they have been thinking about it for a while now, but they needed to discuss it with the larger banks and of course find the appropriate terms. It has become more serious over the last few weeks because the rate for bank to bank lending has risen again. The Bank of England also help a special aution for the banks.

Back To Financial News April 2008
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