Changes to Credit Guarantee Scheme
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Released 15 December 2008
The Government is today announcing proposals for changes
to the Credit Guarantee Scheme. These changes are designed to enhance the
effectiveness of the Scheme in supporting stability in the financial sector and
maximise its impact on wider economic stability through supporting lending to
the economy. They draw on experience gathered over recent weeks of operating
the scheme and follow discussions with participating banks.
Taking account of international experience, and market
developments (in particular the falls in bank risk premia), the Government is
adjusting the formula that determines the fees paid by participating
institutions for use of the Government guarantees. This will lead to those
institutions paying a lower – but still commercial – fee for use of the Scheme,
reducing their cost of funding under the scheme, and more closely aligning the
scheme with those in other countries. This in turn will support their ability
to continue to extend credit to the economy. The Government will, through the
Lending Panel, ensure that this is reflected in the terms and availability of
credit to households and businesses.
To enable participating institutions to better manage the
transition from guaranteed to wholly unsupported funding the government will
also lengthen the scheme, from 3 to 5 years, ending in April 2014. Within
that, the 3 year maximum term of individual instruments will be retained, with
some flexibility to roll them over as agreed with the Treasury. At present the
Scheme guarantees borrowing in Sterling, Euros and US Dollars. In future they
will also be able to borrow in a wider range of currencies, further extending
the investor base in UK banks and building societies.
These changes will enable banks and building societies to
borrow from a diverse range of investors, improve their financial positions, and
therefore pave the way for them to lend to the economy.
The Scheme is open for an initial period of six months.
This, and the size of the Scheme, will be kept under review. These proposals
vary the Scheme as approved by the European Commission on 13 October 2008 and
are subject to the Commission’s approval under the State Aid rules. The
Government has informed the European Commission of these proposals and will
bring forward changes to the rules of the Scheme to implement these proposals
once it has obtained the Commission’s approval.
On 8th October 2008 the Government announced a
Credit Guarantee Scheme, as part of a comprehensive package of measures to
address the extreme stress in financial markets, and to prevent the collapse of
the banking sector. Similar measures were subsequently adopted by a number of
other countries and have achieved their intended effect of stabilising the
Detailed arrangements for implementing the Credit
Guarantee Scheme were announced on 13 October 2008. The basic principle was to
charge a commercial fee for the guarantee, to ensure that the taxpayer was
properly remunerated for the risk involved. The scheme was implemented rapidly,
and the Government expects that by the end of 2008 approximately £100bn of
guarantees will have been made to participating institutions. In total, the
Government estimates participating institutions will issue £250bn of guaranteed
debt. Following the announcement of the scheme and the Government’s proposals
for recapitalising the banks, the positive market reaction has reduced the risk
premium (or credit default swaps) of UK banks. As a result the Government
decided to look again at the pricing structure of the scheme to ensure it
continued to reflect commercial terms.
The Chancellor announced on 25 November that the
Government would undertake a quick review of the arrangements for this scheme
and assess whether they have any implications for the Crosby proposals and how
it was working in practice, to maximise its impact on financial and wider
economic stability while ensuring it did not crowd out market-based lending now
or when better market conditions return. In particular the review considered
whether changes could increase the flow of competitively priced funds to needy
borrowers. The Chancellor said that the review would be completed before
The Government will continue to monitor the
effectiveness of the scheme and will keep under review the pricing structure of
the scheme, to ensure that it continues to reflect commercial terms, taking
account of the changing market circumstances.
As announced in the Pre-Budget Report, the
Government is developing Sir James Crosby’s report on finance in mortgage
markets. To implement Sir James’s recommendation, the Government would need to
obtain State Aid approval from the European Commission and resolve some
technical and practical considerations. The Government is proceeding to work up
a detailed scheme and seeking State Aid approval to proceed. This will take
into consideration the interaction between this proposal and the Credit
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Article Published/Sorted/Amended on Scopulus 2008-12-18 12:48:01 in Business Articles