The Bank of England today ruled out an extension to its emergency funding scheme for ailing banks in a bitter blow to the mortgage market.

Governor Mervyn King said it was not the job of the central bank to “finance bank lending” by acting as "a magical piggy bank" or execute bailouts such as those of Fannie Mae and Freddie Mac in the US.

It came as he confirmed the special liquidity scheme set up to help banks struggling to raise funds in the credit crunch was always a temporary measure and would close as planned on
21 October. Mortgage lenders had hoped for an extension.

King said long-term funding for banks and other lenders must come from either the money markets through interbank lending or the taxpayer but warned any Government-funded mortgage scheme carried significant risks to the taxpayer.

"If the Government provides the funding, it takes on the credit risk," King told MPs on the Treasury Select Committee. "You cannot provide the funding without taking on that risk."

Chancellor Alistair Darling is considering how best to kick-start the mortgage and housing markets and is thought to be lukewarm on the idea of Government-funded mortgages.

The SLS was set up in April and allowed banks to swap untradeable mortgage securities for liquid Treasury bills for up to three years.

It was brought in to provide banks with breathing space to repair their balance sheets. It is thought troubled lenders may have tapped the Bank for as much as £200billion.

King said the Bank will next week outline what it plans for the future, including a permanent liquidity insurance facility and a framework to ensure the stability of the banking system.
He said the SLS was only ever "a temporary measure" and the new scheme will provide help to banks over a much shorter period than three years.

"The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks," said King.

"It is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system — indeed it cannot do that.

"Only private savers or taxpayers via the government can provide such funds. So I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending."

He said it was down to the banks to sort out their balance sheets. "The problem does not lie in the mortgage market, he said. "Let's step back and look at the source of the problem."