Bank of England announces £50 billion loan

The Bank of England has announced plans to pump £50 billion into the financial system to prevent the credit crisis causing more harm to the UK banking system and economy.

Chancellor Alistair Darling said without the rescue there is every chance that the situation will get worse.

Mervyn King, the Bank of England’s Governor said the scheme is aimed to improve liquidity in the banking system. The scheme will also increase confidence in financial markets, said Mr King.

Under the scheme, billions of pounds of taxpayers’ money will be injected into banks which have been damaged by the credit squeeze.

Banks will be able to exchange their mortgage debts for secure Government bonds to enable them to operate during the credit squeeze.

The swap will be for a period of 12 months and may be renewed for a total of up to 3 years. However, it will only apply to mortgage debts on banks’ books at the end of last year and the swaps cannot be used to finance new lending.

Liberal Democrat Treasury spokesman Vince Cable warned that the move could be a bad deal for taxpayers, leading to a situation where the banks are able to privatise their profits and nationalise their losses.

However, Mr King defended the scheme and said it guaranteed that the risk of losses on the loans remained with the banks.

A recent report by property website, Rightmove, warned if the mortgage meltdown is not stopped, falling property prices could result in a crash.

Rightmove said the mortgage crisis could have a devastating effect on the UK housing market if the Bank of England’s £50 billion emergency rescue plan does not work.

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