The central bank says it is only weeks away from launching such a plan, which has been designed to unblock the logjam in the money markets, but MPs have slammed the proposals for nationalising banks’ losses.
Although details and criteria are still being finalised it is understood that the plan has been created to potentially allow banks to lend to each other using the bonds as security.
Vince Cable, shadow chancellor for the Liberal Democrats, says: “It is obviously necessary for urgent action to be taken to unblock the mortgage market and to break the crippling effects of the credit crunch.
“But we cannot have a situation where the banks are able to privatise their profits and nationalise their losses.”
Cable adds: “Since the mortgages from banks are of inferior quality and higher risk than the government bonds which they are replacing, the implication must be that taxpayers are shouldering the risks and losses of the banks. This cannot be right.
“We need urgent reassurances from the government that the exchange is taking place on a discounted basis so that the banks and not taxpayers carry any losses.”
He says that in return for bailing out banks the government must now insist on an orderly programme for identifying losses in the banking system, to ensure banks cover those losses themselves by stopping dividend payments and raising money from shareholders.