Sept. 3 (Bloomberg) -- U.K. banks probably have tapped the Bank of England for more than 200 billion pounds ($354 billion) less than two months before its emergency funding plan is scheduled to end, according to UBS AG analysts.
The central bank's so-called special liquidity scheme, established in April and set to close in October, allows banks to swap mortgage-backed securities hurt by the credit squeeze for government bonds. Banks may face insolvency unless central bank Governor Mervyn King succeeds with his plan to put in place a new money-market system, UBS said.
``A permanent solution is needed,'' said the London-based analysts led by Alastair Ryan in a research note to clients dated Sept. 1. Otherwise ``U.K. banks will have perhaps 200 billion pounds of exploding funding'' to refinance within the next three years and would be forced to cut back lending and shrink assets. House prices could decline 40 percent without central bank help, Ryan said.
HBOS Plc, Britain's No. 1 mortgage lender, may be the biggest user of the U.K. central bank's bond plan, ahead of Lloyds TSB Group Plc, Barclays Plc and Royal Bank of Scotland Group Plc., Collins Stewart analysts led by Alex Potter in London wrote in a note to clients. HBOS relied on money markets to fund more than 50 percent of new mortgage lending before credit markets seized.
``We're not commenting on speculation about the usage of the scheme,'' a central bank official who declined to be identified in line with bank practice said in a telephone interview today. ``As has always been the case, there's no cap on the scheme. The size reflects its use.''
The U.K.'s Daily Telegraph newspaper reported the estimate of central bank funds used earlier today.
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