The Bank of England on Monday announced a $100 billion plan to allow banks to swap mortgage-backed securities for Treasury bills. The bank's aim is to unblock the interbank lending market, by giving banks assets they can use to operate, in hopes they will then resume lending more - and support the housing market and the overall British economy. Banks have become increasingly reluctant to lend to rivals in the wake of the global credit crunch. The bank is offering the asset swaps for one year, but they will be renewable for up to three years. Only assets that existed at the end of last year will be eligible, the central bank said.

The risk of losses on the swapped assets will remain with the commercial banks, not the taxpayers, the Bank of England said.

"The Bank of England's special liquidity scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks," said central bank Governor Mervyn King.

Banks will be able to swap a range of high-quality assets, including AAA-rated securities backed by British and European residential mortgages for Treasury bills. Though the assets have significant value, banks haven't been able to use them to raise money because all such securities are tainted by the crisis over lower-quality securities backed by mortgages given to people with weak credit.

"Banks will need, at all times, to provide the Bank of England with assets of significantly greater value than the Treasury bills they have received. If the value of those assets were to fall, the banks would need to provide more assets, or return some of the Treasury bills," the bank said.

The Bank of England is offering the swaps starting Monday and continuing for six months.

"Given its scale, the scheme is indemnified by the Treasury, but is designed to avoid the public sector taking on the risk of potential losses," the Bank of England said.

The Bank said the size of the liquidity injection would depend on market conditions, but it said the commercial banks of suggested that they were likely to subscribe for about $100 billion in swaps.

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Bank of England: http://www.bankofengland.co.uk/

Written By ROBERT BARR

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