Britain Considers Way To Help Ease Loan Market

LONDON — The Bank of England and the British government are considering an unprecedented move intended to help restore liquidity to the money markets by taking over the mortgage-backed assets of some banks.

The plan would mirror some steps by the Federal Reserve in Washington.

The Bank of England and the Treasury are still finishing the details but essentially the plan would offer government-backed bonds in exchange for securities backed by mortgages, said a person with knowledge of the discussions, who declined to be identified before the plan is made public. The plan could be announced as early as next week.

The chancellor of the exchequer, Alistair Darling, and Prime Minister Gordon Brown have come under increasing pressure as banks have started to limit their lending, even to each other.

Banks have unwilling to lend because they do not trust the value of their mortgage-backed assets at a time of falling property prices. As a result, the banks failed to pass along to customers recent interest rate cuts by the Bank of England, putting further pressure on the housing market and forcing the government to step in.

“This would definitely help,” said Jane Coffey, head of global equities at Royal London Asset Management. “It won’t be the cure for all ills as they still face a lot of challenges with the housing market, and we’ll see falling earnings in the banking sector for the next two years, but we need to see more action because just cutting base rates won’t be enough.”

Mr. Brown, who is in the United States meeting with the Fed chairman, Ben S. Bernanke, and the heads of American investment banks, has been working with executives of British banks to come up with a long-term solution to ease the money supply so that banks would be willing to lend.

The difference between the central bank’s benchmark interest rate and the cost of borrowing for three months increased to the highest level since December as lenders, lacking confidence in the market, preferred to hoard money.

Some economists said that the housing market was the biggest worry for the British economy at the moment as the decade-long housing boom, which had spurred economic growth and bolstered consumer confidence, was coming to an end. House prices dropped 2.5 percent in March from a month earlier, according to the largest British mortgage lender HBOS, and there are signs that the decline is weighing on consumer spending.

To ease pressure on lenders, which have started to reduce credit limits for clients, the Bank of England has already injected about £50 billion, or $99 billion, of cash into the markets.

In the United States, the Federal Reserve in March offered lenders the opportunity to exchange debt, including mortgage-backed securities, for treasury securities for the first time. The European Central Bank, which has not lowered rates as it continues to focus on fighting inflation even though the economy has started to show signs of weakening, has no intention of offering banks a similar exchange, the central bank president, Jean-Claude Trichet, said on Thursday.

However, the European bank has always had a policy of accepting some asset-backed securities as collateral because it adopted such rules from the central banks that preceded it before the euro was created in 1999. The proportion of collateral of this type on deposit with the central bank has risen since the financial market turbulence in August.

But Mr. Trichet has said that the bank is not worried that some of that collateral might be declining in value.

Help by the Bank of England will be welcomed by the British Banking Association, which said Thursday that it was “very supportive of the central bank’s current efforts to increase liquidity in the markets.”

But any plan will also have to get the support of British taxpayers, who are already concerned about having to partly pay for the nationalization of the troubled mortgage lender Northern Rock in February. Mr. Brown, whose reputation suffered after a run on Northern Rock, is anxious to show that any plan to help revive money markets will not be an easy way for banks to get rid of worthless mortgage assets, and that taxpayers are protected.

George Osborne, the Conservative Party’s candidate for chancellor, earlier this week criticized the government for “dithering” while the housing market deteriorated and urged Mr. Brown to “unfreeze the mortgage market with the collateral swap program that I set out.”

Mr. Darling is set to meet with mortgage lenders next week for more discussion on possible ways to aid the housing market.

Graham Bowley contributed reporting from New York and Carter Dougherty from Frankfurt.

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