Bank Of England : The Bank of England has announced a ‘special liquidity scheme’ to try to get the money markets moving and boost confidence. Mervyn King, governor at the Bank of England, unveiled a lifeline of £50 billions, to help banks and building societies through the credit crunch.
Bank Of England : Mr King emphasised that the scheme would not be used to prop up a failing bank, or to underpin the sliding housing market. He also said that it would not increase the Government’s net debt. The purpose of this ‘gift’ is to get the banks to start lending to each other and their customers again.
Due to the knock-on effects of the credit crunch, banks have recently become very wary of issuing loans, causing interbank lending to virtually become dried up. This has had a disastrous effect on the mortgage market with several banks and building societies being forced to raise their rates and reduced the amount of mortgage products on offer to first-time buyers. This has led to downward pressure on house prices, which in turn has hurt consumer spending and the wider economy.
By allowing banks to exchange their mortgage-backed securities for more reliable Government bonds, the treasury hopes lenders will be able to start offering more cheap deals. Mr King hailed his new bonds-for-mortgages scheme as the best way of improving liquidity in the banking system and restoring confidence. Under this package, banks will need to provide assets of ‘significantly greater value’ than the bonds they have received. The bonds will not be allowed to be used by failing institutions, and can only be given to healthy banks to help to ease the pressures in the money markets.
Mervyn King said, “The objective in this scheme is not to protect the banks, it is to protect the public from the banks.”
A senior banking source warned it could take up to 18 months for the benefits of the cash injection to feed through to first-time home buyers, as lenders remain reluctant to take risks.
Richard McGuire, of investment bank RGC Capital Markets said, “The scheme was unlikely to do much to inject new life into the UK’s troubled mortgage/housing markets, given the costly nature of the exercise.”
However just as in our daily lives, no one can predict your future, similarly there is no guarantee that this bail-out will lead to cheaper mortgages in the short-term.
For more information on mortgages visit www.myfirsthomeltd.co.uk
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