Britain unveils plan to help banks with credit crunch

By Matt Falloon and Christina Fincher

LONDON (Reuters) - The Bank of England unveiled an ambitious plan on Monday to swap banks' risky mortgage assets for at least 50 billion pounds ($100 billion) of government debt in the latest bid to spare Britain from the ravages of a global credit crunch.

Central banks everywhere have been desperately trying to get confidence back into markets, but despite eight months passing and billions spent, banks remain afraid to lend money because they don't know each others' exposure to bad U.S. home loans.

In Britain, the credit crunch has already taken down Northern Rock bank and concern is building over the financial system and the wider economy as new buyers are shut out of the housing market as cash-strapped lenders restrict mortgages.

Prime Minister Gordon Brown, whose popularity has slumped as voters lose faith in his handling of the economy, has made reviving the mortgage market a priority for his government as fears of a real estate crash have shot up in recent weeks.

His finance minister Alistair Darling said he would meet lenders on Tuesday to get them to do their bit for the economy, by passing on interest rate cuts and doing more for people refinancing their mortgages.

Speaking to reporters after the plan was announced, BoE Governor Mervyn King said the Special Liquidity Scheme (SLS) would not make things better overnight but would at least give banks access to a greater pool of cash.

The 50 billion pounds was just a start and there was no arbitrary limit, he said.

"What we have to do is to create an environment in which a bank knows that not only it, but other banks, can come to the Bank of England and exchange their illiquid assets for liquid assets," he said. "It is restoring confidence in banks being able to deal with each other that is key in this."