Statement on Banks and Building Societies
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25 November 2008
The
Government announced a package of support for financial stability on 8 October,
and set out how it would apply to individual banks on 13 October and 18
November. It made further announcements in the Pre-Budget Report on arrangements
to work with the banking sector. This statement provides an update on ongoing
elements of this work.
Lending Panel
The
Government announced in its Pre-Budget Report yesterday further measures to work
with banks and building societies to ensure that they continue to support the
wider economy during the downturn.
A Lending
Panel has been established to monitor lending to both businesses and households,
and to promote best practice across the industry in dealing with borrowers
facing financial difficulties. The Lending Panel will report to the Chancellor
of the Exchequer and the Secretary of State, BERR. It will meet monthly, and
will comprise the Government, lenders, consumer, debt advice and trade bodies,
and regulators and the Bank of England. Arrangements for the first meeting will
be announced shortly.
The
Pre-Budget Report also announced the establishment of a discussion forum,
chaired by the Economic Secretary to the Treasury, to look at how banks and
other financial institutions can work better in the interests of consumers and
society as a whole. Membership of the forum will be drawn from retail financial
institutions and consumer groups, and arrangements for the first meeting, will
be announced shortly. An update on the forum’s work will be provided at Budget
2009.
Bank Recapitalisation Programme
The Bank
Recapitalisation Programme helps enable banks to increase the level of tier one
capital they have available, above that required to meet regulatory
requirements, to maintain financial stability and ensure they are strong enough
to continue to lend to businesses and consumers during the downturn. For RBS,
and (subject to the merger) HBOS and LloydsTSB, the Government has underwritten
significant capital raisings amounting to £37bn; other banks, such as Barclays,
Abbey and HSBC, have chosen to fund capital increases from their own resources
or from private investors. Those banks whose capital raising has been
underwritten by the Government have committed to maintain the availability and
active marketing of competitively priced lending to homeowners and small
businesses at 2007 levels.
The FSA
made a statement on 14 November clarifying its position on the capital
requirements for banks as part of the overall support package. The statement
made clear that the appropriate level of capital for each institution is
determined by the FSA in relation to that institution’s specific risks and
circumstances. However, in reaching that determination the FSA used a common
framework of capital ratios to risk weighted assets, in particular a total tier
1 capital ratio of at least 8 per cent and a core tier 1 capital as defined by
the FSA of at least 4 per cent after an individually stressed scenario. In this
statement, the FSA made clear that this approach was not intended to set new
minimum capital ratios, rather it was the framework adopted in the context of
implementing the overall support package. As the FSA has already announced, it
will address the longer-term capital regime for deposit takers in a Discussion
Paper in the first quarter of 2009. It should, however, be recognised that the
banks were recapitalised to create a larger, usable buffer of capital to absorb
losses that might occur during the recession and so they can continue to extend
new lending.
It will
take time for the effects of the recapitalisation of banks to take effect.
However, since 7 October the credit default swap spreads have already fallen by
approximately 30-50 per cent for the banks whose capital-raising have been
underwritten by the Government. LIBOR rates have fallen by more than 200 basis
points since 8 October.
The
Government has made clear that the Bank Recapitalisation Programme remains open
to eligible institutions and has set out the general principles applying and
conditions that must be satisfied.
Looking
ahead, the Government, the FSA and the Bank of England are examining ways of
making the capital and liquidity regimes for banks less pro-cyclical and are
working through the FSF and other fora towards international measures to dampen
the cyclicality of the system.
Credit Guarantee Scheme
Since 13
October, sufficiently capitalised eligible institutions have also had access to
Government guaranteed funding under the Credit Guarantee Scheme, an integral
part of the Bank Recapitalisation Programme. The Government expects that by the
end of 2008 some £100bn of guaranteed debt will have been issued by
participating institutions.
The Scheme
has helped to strengthen stability in the banking sector and hence the wider
economy. Along with the recapitalisation arrangements, it has helped
institutions to take steps to issue debt. However, markets can move quickly and
there continue to be new developments. Sir James Crosby has completed his
report on supporting a resumption of the mortgage-backed securitisation market
through a guarantee scheme. Other countries have announced and started to
introduce schemes similar to the Credit Guarantee Scheme. City participants
have made a number of suggestions about the Scheme. The Government will
therefore undertake a quick review over the coming weeks of the arrangements for
this scheme to assess whether it has any implications for the Crosby proposals
and how it is working in practice, to maximise its impact on financial and wider
economic stability while ensuring that it does not crowd out market-based
lending now or when better market conditions return. In particular, the review
will consider whether the changes will increase the flow of competitively priced
funds to needy borrowers. The review will be completed before Christmas.
In total,
the Government expects participating institutions to issue up to £250bn of
guaranteed debt. The scheme is open for an interim period of six months
initially, for debt of up to 36 months’ maturity. These limits will be kept
under review.
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Article Published/Sorted/Amended on Scopulus 2008-11-27 12:13:13 in Business Articles
