Lenders may boost Bank asset swap to £90 billion

Banks are said to be set to swap almost twice the £50 billion in mortgage-backed assets envisaged by the Bank of England plan unveiled last month.

Insiders say the lenders are now lining up between £80 billion and £90 billion in securities to exchange for Treasury bills.

Debt-market sources told the Financial Times the banks have approached credit ratings agencies for advice on how best to restructure the mortgages to make them eligible to swap under the scheme.

Bank Governor Mervyn King said this week that the Special Liquidity Scheme had been successful so far in stabilising confidence in the financial sector, but warned that markets remain fragile.

The solid collateral of Treasury bills is aimed at reducing banks' borrowing costs. The Bank arrived at the £50 billion figure after discussions with lenders. It was based on the extent to which they were having trouble raising cash for unsecured borrowing. But the Bank is understood to have left the way open to increase the figure.

The plan is the latest attempt by authorities to unblock the frozen bank-lending market, brought to a halt by the credit crunch in the wake of the subprime mortgage crisis.

Jitters among the banks about lending to one another have driven Libor to almost one percentage point above the Bank's current 5% rate.