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by Rachel Robson

‘It seems that a deal between the Bank of England and the retail banks is on the cards,’ says The Guardian’s Nils Pratley about the recent plan to help ease problems in the mortgage markets by allowing banks to swap their mortgage-based assets for government bonds. Pratley says the idea would be a ‘fundamental change in the Bank’s lending policy’ and acknowledges that it is ‘probably a sensible decision’.

However, he points out that the move is ‘not a cure’, because the mortgage market is not about to return to ‘pre-crunch levels of activity’ and that the supply of credit will still be tight, ‘and will remain so until banks are willing to lend to each other over long periods.’ He also questions what is being demanded by the Bank of England in return for its change of policy. ‘Are arms being twisted to encourage banks to strengthen their balance sheets by raising capital?’ he asks.

The Independent’s Jeremy Warner points to hopes that the announcement itself may cause the market to start functioning again of its own accord. ‘Once bankers know that mortgages can be traded for government securities, they may be more willing to start lending against them again,’ he explains.

However, he is clearly sceptical of the initiative, pointing to similarities between the plan and what happened with Northern Rock. ‘Broadly it mirrors what was done at Northern Rock,’ says Warner. ‘The Bank of England initially attempted to tide the bank over its funding difficulties by lending against the collateral of the mortgage book. It backfired badly but predictably, culminating ultimately in nationalisation.’

Warner also questions when this nationalisation of Britain’s stock of mortgages will end and whether it will ‘have the desired effect of making cheaper credit more available’ and concludes that, ‘Whatever the answers, the banks will be made to pay a high price for going cap in hand to the taxpayer.’