BoE, Fed deny mortgage security buyout plan

 Updated on 22/03/08: Central banks on both sides of the Atlantic are in talks about the feasibility of mass purchases of mortgage-backed securities (MBS) in a bid to solve the global credit crisis, according to a report on the website of Financial Times (FT).

"Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.

"The conversations, part of a broader exchange as to possible future steps in battling financial turmoil, are at an early stage. However, the fact that such a move is being discussed at all indicates the depth of concern that exists over the health of the banking system," the report said.

The report added that the talks show how far the policy debate has shifted in recent weeks as the crisis has spread to prime mortgage assets in the US and engulfed Bear Stearns.

The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic, the report said.