BoE looks at Canada style deal to restart credit

Key players in the asset-backed commercial paper market (ABCP) are understood to be in talks with the Bank of England to find a solution to the market log-jam as banks' ABCP operations come under pressure.

The Royal Bank of Scotland is understood to be one of the banks talking to the Bank of England about a Canadian-style solution that would involve banks and investors agreeing to convert ABCP into longer-term loans.

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ABCP is short-term debt which banks issue to investors through investment vehicles called conduits that sit off the lenders' balance sheets. The banks make money by using cheap ABCP to invest in longer-term, higher-yielding assets such as mortgage - or credit-card-backed - securities.

The market for ABCP has seized up because investors no longer trust the credit ratings on the assets held in conduits as the sub-prime market has imploded. The problem was highlighted yesterday when Standard & Poor's dramatically downgraded its debt ratings for two UK hedge funds exposed to the US mortgage market from investment standard AAA to junk level CCC+ and CCC.

Last week, Canadian banks and investors agreed to convert ABCP into longer-term floating rate notes, giving relief to issuers that could not get funding for their ABCP.

RBS declined to comment on discussions with the Bank of England. On Tuesday, HBOS said it would fund its Grampian conduit from group money because the cost of selling ABCP was too high.

HSBC said its main conduit, called Solitaire, was still funding itself in the ABCP market but that the market was difficult. On the proposed plan to unblock the market, an HSBC spokesman said: "HSBC feels the initiative in Canada to forge an industry solution was a success but it is too early to say whether that initiative would be a useful model for others to follow."

Lloyds TSB said its $23bn (£11.5bn) Cancara conduit was funding itself and that the bank did not see that changing.

RBS did not comment on funding of its $14bn Thames Asset Global conduit. Barclays Capital, the investment banking business of Barclays, declined to comment on its conduits.