According to the BBC, the Bank of England, backed by the Treasury, is planning to allow banks to swap their mortgage based assets for Government bonds in an attempt to encourage banks to start lending to each other more easily.

It is thought that Mervyn King, the Governor of the Bank of England, has been working on the plan for the past month and a half, consulting the UK and abroad – particularly with financial experts in the US, to work out the effects such a scheme could have.

The Government says it does not consider the move as a ‘bail out’, simply a way to ease the current lending pressures, and according to reports, it won’t go ahead unless the scheme can be designed in such a way that it protects the tax payer from any loss, which could mean swapping the assets for bonds worth less than their market value.

It is thought that banks will welcome the plan with open arms, but Vince Cable, deputy leader of the Liberal Democrats, says although action does need to be taken, he thinks the Government is going about it the wrong way by putting all the risk with the taxpayer.

Speaking to the BBC last night, he said: “I am very concerned that in addition to all the costs associated with Northern Rock, the government is going down the disastrous road of bailing out the banks and leaving the taxpayer with the liabilities.”

The action follows the Prime Minister’s meeting with leading UK banks on Tuesday where he urged lenders to pass on the latest rate cut to borrowers.

But, because the Libor (the rate at which banks lend to each other) has been rising and the sub prime crisis has weakened the value of lenders’ mortgage based assets, banks are reluctant to lend to each other.

The knock on effect of this is that they are tightening their lending criteria to customers too, despite a base rate cut – in fact, just hours after the meeting where Gordon Brown urged lenders to pass on the latest 0.25 per cent cut, the UK’s biggest lender, Halifax, raised some of its rates by half a per cent.

The Prime Minister is currently in the US where he is meeting with various financial bosses and experts to discuss the global credit crisis and how to reduce its impact on the UK. Yesterday he met with Wall Street bank bosses; today, he will meet with Ben Bernanke, the chairman of the US Federal Reserve – the US equivalent of the Bank of England.

© Fair Investment Company Ltd