…liquidity scheme

On Monday 21st April 2008 the Bank of England made the unprecedented move of introducing an asset swap facility for banks to swap their mortgage backed securities for treasury bills in an attempt to improve liquidity and confidence in the financial markets.

Only AAA rated mortgage securities that were on the banks balance sheets at the end of 2007 will be accepted as the Bank of England was keen not to been seen stimulating new lending.  Unfortunately, stimulating new lending is exactly what needs to happen as the falling level of competition in the mortgage market is what is causing the increase in the cost of new mortgages and remortgages.  Furthermore, by accepting existing mortgage books, we feel that the Bank of England is less able to control the quality of the securities the banks deposit.

Ideally, we would like to see the Bank of England and the FSA work with the mortgage industry to come up with standard risk categories for mortgages that fit within the Basel II framework, in order to restore confidence and investor appetite to the mortgage backed securities market.  This would also provide the Bank of England with a more sophisiticated set of tools for providing liquidity support to the industry as they would be able to stimulate lending in different sectors of the market, such as first time buyers.