The Bank of England (BoE) yesterday released details of its Special Liquidity Scheme, which effective immediately will allow banks to temporarily swap high-quality mortgage-backed securities for UK Treasury bills.
Under the scheme banks will be able to enter into new asset swaps for the term of one year. They will be able to renew the swaps each year for a total of three years – at BoE’s discretion.
The swaps will only be available on loans that were already on banks’ balance sheets before the end of 2007; the risk of the losses on the loans will remain with the banks.
Governor of the BoE Mervyn King said the scheme was designed “to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring the losses on the loans they have made remains with the banks”.