Bank of England and govt working on plan to ease credit crunch

The Bank of England is working with the government on a plan to ease the credit crisis by allowing banks to swap mortgage-based assets for government bonds.

The central bank refused to comment on the speculation, although several newspapers have quoted government sources as saying a deal to help liquidity is not far off.

The scheme is expected to cover mortgages issued up to the end of December last year to keep the risks down for taxpayers.

Last month, the US Federal Reserve announced a similar plan.

Leading bankers reportedly told prime minister Gordon Brown on Tuesday that smaller lenders would soon be forced to withdraw mortgages unless the central bank stepped in.

Several banks have already withdrawn mortgage products, or in the case of First Direct, whole ranges, as turmoil in the money markets continues.

Mr Brown has urged banks to pass on the interest rate cut to consumers in order to help borrowers, but lenders are reluctant as the interbank lending rate remains high.

The plan is believed to have been discussed at the Downing Street meeting and would need government approval to go ahead.

Following the summit, Mr Brown traveled to the US to speak to Wall Street bankers about the ongoing subprime crisis.

Several US banks have been reporting results this week, and more writedowns are expected.

JP Morgan Chase said profits had halved over the first quarter in results released this week while rival Merrill Lynch is today expected to report up to $8bn (£4bn) in new losses relating to the subprime crisis.

Mr Brown wants banks to report losses as early as possible in order to restore confidence in the market.