British Banks Special Liquidity Scheme

UK banks have swapped about £100bn of securities which were mortgaged for Treasury bonds. This is however more than the amount which was originally expected to be swapped claims Alistair Darling. This statement by Mr Darling reveals the degree of exposure of the taxpayers in the Mortgage market under the “special liquidity scheme” (SLS) of Bank of England which opened in April this year. The liquidity scheme is a successful way of providing liquidity to the British market and also compatible to the US plan. Though nothing has been stated about the number of mortgage-backed securities which could be swapped for government papers, yet the banks have been using this service to increase liquidity. However, though the service has been given an AAA-rate, taxpayers still have a margin of risk. This facility which was supposed to continue till October has been extended till January as it helped maintain a stability of the banks despite the turmoil experienced on the Wall Street. The Bank of England was in a position to use its discretion either to accept or reject applications of banks wanting to borrow under this scheme. About £90bn of mortgage- backed securities were introduced which would be placed under the scheme. The central bankers’ bank stated an increase in the mortgage securitisation in the second quarter.

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