A new Bank of England scheme aims to increase confidence in financial markets.

The Bank of England (BoE) has today launched a £50 billion scheme to bail out Britain’s banks in an effort to revive the ailing economy.

The unprecedented move will allow banks to temporarily swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans will, however, stays with the banks.

Currently, banks have an ‘overhang’ of assets which they cannot sell or pledge as security to raise funds because markets for many securities are closed. This is stretching their financial position meaning they are reluctant to make new loans – even to each other.

“By tackling decisively the overhang of assets in this way, the scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets,” the BoE said in a statement.

The asset swaps will last one year and may be renewed for up to three years, with banks charged a fee based on the three-month London interbank interest rate (Libor). They are only available for assets existing at the end of 2007 and cannot be used to finance new lending.

Mervyn King, Governor of the Bank of England, said: “The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.”

Banks will be able to enter into new asset swaps at any point during a six-month window, starting today (April 21).

By Natasha Piscitelli