Bank of England may join securities buy-up plan

The Bank of England is considering participating in a "mass purchase" of troubled mortgage-backed securities by the world's central banks and has given a tacit nod to a reform of the way it helps the big banking groups with emergency funding.

Reports over the weekend suggested that the Governor of the Bank, Mervyn King, is sympathetic to a request by Britain's big five banks to introduce a system of funding similar to that used by the Federal Reserve in the United States, via a so-called "discount window", and to accept a wider range of bank assets as collateral for loans from the Bank of England. The Bank also pledged to try to limit any stigma attached to such help, although officials agreed this would be more difficult.

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Chief executives from Barclays, HSBC, Royal Bank of Scotland, Lloyds TSB and HBOS held a meeting with Mr King on Thursday, having watched the shares of many banks, especially HBOS, fluctuate wildly as alarmist gossip was propagated around the City. With a strengthened guarantee from the Bank of England, the major banks think they will have a stronger chance of resisting such speculative upheavals.

Last week, the Bank of England pushed a further £5bn into the money markets, in addition to the usual weekly funds offered to commercial banks, which made a total of £11bn for the week, one of the most tempestuous in the City in decades.

A more revolutionary solution to the credit crisis now being floated is for the world's central banks to simply buy up unwanted mortgage-backed securities. This multilateral nationalisation of the problem would be achieved using public funds to buy trillions of dollars' worth of commercial paper of varying – and sometimes unknown – quality. This would be a hugely controversial move, inviting allegations that ordinary taxpayers were bailing out Wall Street and the City.

Talks about such an idea are reportedly at an early stage, with the Bank of England and the United States Federal Reserve the most gung-ho and the European Central Bank the most sceptical potential member of the concert party. There are some $6 trillion of mortgage-backed assets outstanding, of which $1 trillion or $2 trillion are thought to be shaky, although the future quality of the entire US mortgage loan book depends crucially on how long the real-estate slump there lasts. Were the securities to be bought up it might help the banks return to lending, boost the property market and reduce the cycle of default, price falls and credit tightening that has befallen the US economy.

However, despite the arguments for such bold action and the US Federal Reserve chairman Ben Bernanke's expertise on the economics of the Great Depression of the 1930s, the Fed is thought to believe that the situation is not quite severe enough to warrant such a policy.