Downing Street Says » Bank of England Liquidity

Asked why last week the had Prime Minister had denied plans to swap debts when asked about the subject, the PMS said that he thought that that question might come up and referred to the transcript of last week’s conversation in which the journalist’s specific question had been whether or not the Prime Minister could confirm that the British Government was going to swap debts with banks, taking on some of their bad debts so that they could remain stable. The answer was that the Government was not taking on the banks’ bad debts; we were swapping debts for high quality assets. It was only AAA assets or above which were being considered as part of the swap. What the Prime Minister had been denying was the reference to bad debts.

Put that the Prime Minister had been asked the same question by another journalist last week and had said that swapping was not the first thing to do in this situation, the PMS said that he had not checked the transcript for that particular question but he would do so. He added that we had always made clear that significant additional liquidity for the banking system was something that was being considered.

Asked how confident the Government was that the AAA assets taken on would remain so, the PMS said that there had been a number of measures which had been put in place and announced by the Bank of England today to ensure that the tax payer was protected; firstly by ensuring that the assets swapped were high quality assets; secondly, that the value of the assets that the banks provided as collateral were greater than the value of the Treasury Bills that the Bank of England would swap them for; thirdly, that the banks would be charged a commercial interest rate and fourthly that the risk of losses remained with the banks.

Asked why, if an asset was AAA, it should be swapped for a more secure form, the PMS replied that it was because there was a problem in this particular market of liquidity, so it was in order to address the liquidity problem in the market that the Bank of England had taken this action.

Asked if the Government would still press mortgage lenders to pass on the Bank of England rates tax, the PMS replied that that remained the Government’s position; as we had made clear, we wanted to create the conditions that enabled the banks to do so and this was part of what we were doing today.

Put that the Governor had suggested that there was no need for the Government to do that, the PMS said that he had not seen the Governor’s comments in their proper context and would rather do so before commenting further.

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» Monday, April 21, 2008

Bank of England Liquidity

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