Clearly, there are some important details of the government’s package still to emerge, and there is a crucial role for us - as a representative voice for a variety of different types of lender - to try to shape them to deliver the best outcome for all firms. We have also now completed our initial assessment of the announcements against a series of policy priorities we had already identified - some of which were set out at our annual conference in December. That has enabled us to identify exactly what we believe to be missing from the recent round of announcements.
Liquidity measures
The announcements confirmed that, from the end of this month, the special liquidity scheme will close to new use, as planned. It will, however, remain operational for three years thereafter.
But the recent announcements improved the discount window facility established last October as part of the Bank of England's new permanent market operations to provide liquidity for banks on demand. To meet the needs of those banks and building societies that are eligible, the Bank will extend the maturity of the window facility from 30 days to a year for an incremental fee of 25 basis points. The Bank will publish an updated market notice early next month.
Wholesale funding
The government is also extending the drawdown window of its credit guarantee scheme from April until the end of this year, subject to state aid approval. This will help those firms to which the scheme is open - the main banks and around half of building societies - to meet their ongoing wholesale funding commitments as they mature. The scheme will continue as long as wholesale markets remain closed, and will give firms confidence about meeting future commitments.
The government announcement also included details of a guarantee scheme for securities backed by mortgages, which we have been arguing for since autumn 2007. Subject to state aid approval, it will begin in April and there will be a fee for the government to provide a guarantee against AAA-rated asset-backed securities, including those backed by mortgages and corporate and consumer loans.
We would like to see a more inclusive approach to implementing this measure, ensuring it is available to provide help for specialist lenders, as well as deposit-taking institutions. We have been asked by the Treasury to help to work on the detail of the scheme and will therefore try to ensure that it delivers the greatest possible benefit for as many lenders as possible. This will, in turn, help those firms to become involved in new lending, and so extend credit to a wider range of potential borrowers.
Credit insurance
Under new asset protection proposals, the government intends to provide credit insurance to banks and building societies for those of their assets that are hardest to value or which have suffered the greatest losses.
Lenders are expected to take an initial loss, with government support only kicking in after that and then only for 90% of any further losses. The scheme will last for at least five years. There will be a fee for the insurance, but the details of this are not yet known. Initially, it will be open to larger deposit-takers, that is, those with more than £25 billion of eligible assets, although we hope to see it broadened to smaller deposit-takers and possibly to other firms.
By capping potential losses from loans already on their balance sheet, it is hoped that this scheme encourages firms to start lending again. In effect, it provides the benefits of a “bad” bank for poorly performing assets, similar to the measures implemented in Switzerland, but without the cost and complexity of removing those assets from the balance sheet and setting up a new institution.
It is disappointing, however, that, at this stage, smaller deposit-takers have been excluded, particularly as they continue to bear a disproportionate burden of the cost of earlier bank bail-outs through the Financial Services Compensation Scheme (FSCS).
Quantitative easing
Another scheme will enable the Bank of England to buy “high-quality private sector assets” in a variety of forms, including asset-backed securities created in “viable securitisation structures.” Initially, up to £50 billion of purchases will be financed by issuing treasury bills.
Although this will not directly stimulate new lending, it should support the market price of existing bonds, which, in turn, should limit balance sheet losses. It also creates a mechanism for quantitative easing, or boosting the money supply, if this is needed. The aim is to boost investor confidence, with the Bank's activity helping to shore up the price of bonds.
Northern Rock
An announcement by Northern Rock coinciding with the measures unveiled by the Treasury signals a re-think about how nationalised banks should operate in the market. Northern Rock’s new approach reduces the impact on the market of its strategy of shrinking its mortgage book, and so will help ease a squeeze on mortgage lending activity that has weakened the housing market. How far Northern Rock is used as a vehicle for more new lending remains to be seen.
Capital regulation
The government measures also coincided with an announcement by the Financial Services Authority, indicating a longer term desire to build counter-cyclical measures into the regulatory capital scheme. Firms are to be encouraged to build up capital reserves in good years and draw down on them during economic downturns. This could help to dampen down the credit cycle in the long term.
And with banks having re-capitalised last year, the FSA believes they are now in a position in which capital requirements can be eased during the next crucial stage of the recession. This is a vital issue underpinning the potential scale of the home-owner mortgage support scheme.
Gaps to be filled
Apart from the gaps already identified, the largest omissions are in measures to address worsening credit risk. Arrears and possessions will continue to rise this year, so we need more concerted help for borrowers in difficulty. Access to income support for mortgage interest was improved earlier this month, but remains far too limited. And we also need fairer, publicly supported and more widely available sale-and-leaseback options, for those facing the trauma of possession.
Concerted action is also needed to address the continuing exclusion from the housing market of first-time buyers. Some form of mortgage indemnity guarantee from the state, for example, might ease the difficulties of finding the large deposits that are currently required. There is also a wider need to support house-builders, improve the availability of affordable housing, and address the funding problems of housing associations.
Conclusions
We welcome the broad thrust of last week's series of announcements, which were designed to support lending in the economy. Overall, it adds up to a comprehensive and co-ordinated package, sufficiently large in scale to have an impact on improving the flow of lending.
We believe the government has now equipped itself with all the main tools it needs to maintain order in the banking system. Clearly, however, the remaining details - and particularly the level of fees imposed on lenders - will be crucial in determining the overall effectiveness of the package.
In the long term, however, we need to work towards the restoration of a healthy supply of mortgages from a range of different types and size of firm, offering a good choice of products to different types of customers. While there will clearly need to be a prudent approach to judging and pricing risk, it will also be important to guard against financial exclusion, and ensure that there is healthy competition between different types of lenders.
In the near term - as we begin to implement the newly-announced package of measures - it is crucial for consumers, firms and the wider economy that conflicting goals and aspirations do not undermine the effectiveness of what the government is trying to achieve. The government will need to juggle priorities and options carefully. It will need to consider the inevitable trade-offs between different objectives with a clear plan for reconciling them as far as possible. But we stand ready to help it through the minefield.
