Speaking to the Treasury Committee, the governor of the Bank of England, Mervyn King, said it was unlikely that the securitisation market would reopen in the foreseeable future or at the levels that were experienced prior to the liquidity market freeze.
Therefore, he said, the Bank was exploring ways to help improve the market conditions and solve some of the stored-up problems.
King said: “It is unrealistic to assume that markets for many asset-backed securities are likely to re-open speedily or, when they do, to their previous levels of activity. So we are discussing with the banks how a longer-term resolution of the problem might be reached. It is too soon to say where those discussions will lead, but two principles would underlie any central
bank role.
“First, the risk of losses on their lending should remain with banks’ shareholders. The banks neither need nor want the tax payer to insure them against these losses. Second, a longer-term solution must focus on the overhang of assets and not subsidise issues of new assets. One of the lessons of this financial crisis is that providers of mortgage finance had underestimated the risks, and hence the true cost, of the securitisation process.”
Responding to King’s comments, Mark Sismey-Durrant, chief executive of Heritable Bank, compared the action to what the Federal Reserve was doing in the United States.
He explained: “The market is currently logjammed so it will be quite interesting to see the effect of a far greater intervention from the Bank of England than before and whether this will get the market moving again. It could give banks the ability to pledge mortgage assets against liquidity, much like the Fed is doing in the States. The Bank won’t want to take on that risk but it is doing it in the interest of supporting the market.
“It’s more of a confidence trick than injecting any cash into the market, but having such a facility would hopefully unlock the market. I think the UK has missed a more interventionist central bank.”
