/ 22 March 2008

Central banks in mortgage crisis talks

Central banks on both sides of the Atlantic are in talks about the feasibility of mass purchases of mortgage-backed securities in a bid to solve the global credit crisis, the Financial Times (FT) said on Saturday.

The newspaper, without citing sources, said the talks were at an early stage and part of a broader exchange on how to battle the turmoil in financial markets, which has continued despite the injection by central banks of billions of dollars of liquidity and cuts in interest rates.

The Bank of England (BoE) appears to be most enthusiastic to explore the idea, which would involve the use of public money to shore up the market in a key financial instrument, the FT said.

The Federal Reserve is open to the idea in principle, but only as a last resort, while the European Central Bank (ECB) is less keen, it said.

”We’re not providing any comment,” a BoE spokesperson said. Britain’s finance ministry also declined to comment. The ECB and Federal Reserve could not immediately be reached.

Central banks have so far been prepared to lend against mortgage-backed securities rather than buying them outright.

The securities have plunged in value amid a credit squeeze which was sparked by low quality mortgages in the United States, leading to a vicious circle of forced sales, falling prices and weakening balance sheets for banks.

Banks have written down over $125-billion of assets since November, hammering their shares. The DJ Stoxx European banks index has fallen almost 40% since June.

Governments and central banks have made repeated attempts to restore order. Britain has nationalised struggling mortgage bank Northern Rock, Germany is overseeing the rescue of lender IKB and the United States is presiding over a rescue of Bear Stearns .

But markets remain jittery, with Credit Suisse warning on Thursday it could report its first quarterly loss in five years and credit ratings agency S&P saying on Friday it was cutting its view on US banks Goldman Sachs and Lehman Brothers to ”negative” from ”stable”. – Reuters