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Troubled lenders' junk swaps with Bank of England soar

Section: Daily Dispatches

Lenders May Have Tapped Bank Scheme for L200 Billion

By Philip Aldrick
The Telegraph, London
Tuesday, September 9, 2008

Troubled lenders in the UK may have tapped the Bank of England's emergency funding scheme for as much as L200 billion, according to investment bank UBS -- double the most aggressive estimates.

Alastair Ryan, UBS banks analyst, has calculated that "the take-up could be L200 billion or more."

When Bank Governor Mervyn King unveiled the Special Liquidity Scheme in April he indicated that it might be used for L50 billion, while debt specialists forecast a total take-up of L90-100 billion by the time the scheme closed on October 20.

A Bank spokesman said yesterday: "As has always been the case, there is no cap on the scheme. Its size will reflect its use."

The scheme, which allows banks to swap untradeable mortgage securities for liquid Treasury bills for up to three years, has filled the funding hole left by the closure of the wholesale markets since the credit crisis. The last major syndication of mortgage securities was in June last year.

Mr Ryan believes banks are using the scheme to replace maturing funding lines, as well as to fund future lending and past lending that would normally have already been syndicated.

Such action would tally with assertions by Sir James Crosby in his recent mortgage report for the Treasury that "the shortage of mortgage finance will persist throughout 2008, 2009, and 2010" and that banks must find £40bn a year to meet their existing obligations before making any new loans. HBOS alone, Britain's biggest mortgage lender, has L156 billion of wholesale funding that comes up for renewal before June.

The Bank for International Settlements on Monday revealed that UK lenders issued a record L45 billion of mortgage-backed bonds in the three months to June in order to use the scheme. Mr Ryan described it as "a qualified success" because inter-bank lending rates are still well above base rate at about 5.75 percent.

Bankers and economists were surprised by the forecast, calling it "unlikely but plausible." One, Simon Ward, economist at New Star, said: "If it is right, then the British banking system is relying much more heavily on state support than either Europe or the US, which would suggest the banking system here is in greater trouble."

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