The Bank of England disclosed yesterday how far it was watering down its collateral rules for banks that need emergency three-month funding, saying that, for security, it would accept mortgages even when the borrower was in arrears.

Announcing details of its offer of £10 billion of three-month loans to banks, the Bank said that mortgages where the borrower was two months or less in arrears would be acceptable as security.

Mervyn King, the Governor, caused consternation this week when he made a U-turn on his stated policy of a week earlier and announced plans to offer three-month loans to liquidity-strapped banks and to relax the Bank’s normal collateral rules.

Under the new rules, only mortgages with a loan-to-value ratio of 95 per cent or less will be accepted as collateral and the weighted average of the loan-to-value ratio from any bank must be of 75 per cent or less, it said. Banks are debating nervously whether to tap the first of four auctions, planned for next Wednesday, worried about the potential stigma of being seen to need the funding.

“This is a situation where there is going to be safety in numbers,” one banker said. If several banks applied for funds, it was less likely that there would be adverse publicity.

Some banks, although keen to bolster their liquidity, may also balk at the penal rate of interest that the Bank intends to charge. Although the names of borrowers of such lines of credit are kept confidential, information about applications has leaked in the past, putting an unwelcome spotlight on the borrowing bank. Barclays shares were hit when it was revealed that it was applying for an overnight line of credit from the Bank.

Further auctions will take place on October 2, October 10 and October 17, the Bank said.

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