Cash boost to ease mortgage crisis

20 April 2008 12:00am

The British banking system is poised for a major cash injection in a bid to ease the crisis in the mortgage market.

Chancellor Alistair Darling said the Bank of England is to make an announcement on plans for a multi-billion cash boost secured on the mortgage assets of high street lenders.

Banks have been reluctant to lend money to one another following the collapse of the sub-prime mortgage market, limiting the amount of cash available for new home loans.

The Chancellor told BBC 1's Andrew Marr show: "We are trying to unbung that situation so that the Bank will be making money available to the British banking system. It will be lending the money, so its got to be repaid, and we will take securities in return for it.

"But the idea behind it is that it will open up the market and it will begin the process of opening up the mortgage market which will help householders."

Reports have suggested the Bank will swap £50 billion of Government bonds for lenders' assets, prompting critics to claim that the taxpayer is taking on the banks' risks.

But Mr Darling, who will make a statement on the situation to the House of Commons when it returns from a two-week recess, insisted the money will be repaid.

"We believe that this will be an essential step in trying to get the financial market stabilised. That in turn will help the mortgage market too. But it's also important that the banks begin now to disclose the extent of their losses and explain how they are going to rebuild their capital."

The current economic turmoil had been an "unprecedented shock to the system - we haven't seen this in a generation", he said.

The Chancellor compared the situation to a dose of food poisoning, where "some aspects of it just have to work their way through the system".

© The Press Association