Statement on financial intervention to support lending in the economy
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Issued 19 January 2009
With the global economic downturn intensifying in the past two months, the
Government is today announcing a comprehensive package designed to reinforce the
stability of the financial system, to increase confidence and capacity to lend,
and in turn to support the recovery of the economy.
Today’s announcements aim to address the current barriers to lending by:
- extending the drawdown window for new debt under the Government’s Credit
Guarantee Scheme (CGS) which is designed to reduce the risks on lending
- establishing a new facility for asset backed securities;
- extending the maturity date for the Bank of England’s Discount Window
Facility which provides liquidity to the banking sector by allowing them to
swap less liquid assets;
- establishing a new Bank of England facility for purchasing high quality
- offering capital and asset protection scheme for banks, with proposals for
this to be co-ordinated internationally; and
- clarifying the regulatory approach to capital requirements, through an
announcement by the Financial Services Authority (FSA).
The Government intends to negotiate with the banks participating in certain
facilities lending responsibility agreements that will have specific and
quantified lending commitments and that will be binding and externally audited.
The likely impact of today’s announcements on the public finances will be
mostly temporary, as investments will be held for no longer than is necessary to
ensure stability and protect taxpayer interests; liabilities will be backed by
assets; and fees will be charged for relevant schemes.
Today’s announcements build on previous Government measures to support the
economy through the economic downturn:
- in October 2008, the Government announced a comprehensive package of
support for the financial system both to support stability of the banking
system and to protect savers and depositors. Similar measures were adopted by
- in November 2008, in its Pre Budget Report, the Government announced a
comprehensive fiscal stimulus package to support the wider economy,
businesses, homeowners and consumers. Again, similar packages have been
introduced by other governments;
- last week, measures to support lending to small and medium sized
The Government’s measures in October 2008 to recapitalise the banking system
significantly increased the capital ratios of the major banks, and provided them
with a buffer to withstand the current challenging economic conditions.
Over the past two months in particular, the global financial and economic
situation has continued to deteriorate. In particular, internationally, banks’
confidence to increase lending has been constrained by uncertainty about the
value of past investments. Lending by foreign banks, non-bank institutions and
smaller lenders for UK borrowers has reduced. The Government is clear that
meeting lending demand to otherwise creditworthy businesses, homeowners and
consumers is essential for supporting economic recovery. Today’s comprehensive
measures therefore, target the principal sources of continuing uncertainty in
the financial system, and aim to improve confidence, allowing UK lenders to
increase its lending and so play a more effective role in supporting the wider
Credit guarantee scheme
As part of the Government’s additional measures to encourage lending by
financial institutions, the Government is extending the drawdown window of the
CGS from 9 April 2009 to 31 December 2009, subject to state aid approval. This
will support orderly issuance of debt guaranteed under the CGS. All other
aspects of the scheme will remain the same, including the final maturity date of
9 April 2014. During the drawdown window, banks can issue new debt – and once it
has been issued, they can keep rolling it over after the window closes (all of
it until 13 April 2012 and up to one-third of the total until 9 April 2014).
Further details of the scheme’s operation are available on the website of the
Debt Management Office (DMO).
Guarantee scheme for asset backed securities
In addition to the extension of the credit guarantee scheme, the Government
is announcing a new guarantee scheme for asset backed securities, drawing on the
recommendations of Sir James Crosby, to improve banks’ access to wholesale
funding markets, help support lending, and promote robust and sustainable
markets over the longer-term. The Government will, in consultation with issuers
and investors, provide full or partial guarantees to be attached to eligible
triple-A rated asset-backed securities, including mortgages and corporate and
consumer debt. UK banks and building societies eligible to participate in the
CGS will be able to access the new scheme subject to fulfilling the scheme's
conditions. Banks and building societies accessing the scheme will follow
international standards and best practice on underwriting, disclosure, reporting
and valuation. The Government will set conforming criteria to ensure that only
transparent structures and high quality assets are eligible. The scheme will
commence in April 2009, subject to state aid approval.
The Government will work closely with the industry and keep the scope of the
scheme under review. Mortgage-backed securities supported a third of mortgage
lending and the revival of this market is an important element of increasing the
capacity of lenders to provide mortgages as demand increases in future. Further
details will be announced by the DMO in due course.
Mortgages and Northern Rock
The Government will also consider further ways of addressing the loss of
mortgage lending capacity in markets. As a first step, the Government can
confirm that Northern Rock is no longer actively pursuing a policy of rapidly
reducing its existing mortgage book. Northern Rock is releasing a separate
statement on this.
Bank of England liquidity facilities
Since October 2008, the Bank has provided a permanent Discount Window
Facility to banks, with a normal length of borrowing of 30 days. The Special
Liquidity Scheme, introduced as a temporary facility in April 2008, will close
on 30 Januray 2009 as planned, remaining operational for three years thereafter.
Upon its closure in order to ensure the availability of long-term liquidity
provided by the SLS is continued, the Bank will extend its Discount Window
Facility, with its maturity increasing from 30 days to 1-year for an incremental
fee of 25bps. This will enable banks to continue to have access to long-term
liquidity on demand.
Bank of England asset purchase facility
As a further step to increase the availability of corporate credit, by
reducing the illiquidity of the underlying instruments, the Bank of England will
set up an asset purchase programme implemented through a specially created fund.
The Bank will be authorised by the Treasury to purchase high quality private
sector assets, including paper issued under the CGS, corporate bonds, commercial
paper, syndicated loans and a limited range of asset backed securities created
in viable securitisation structures. The Treasury will authorise initial
purchases of up to £50 billion, financed by the issue of Treasury bills. Given
the scale of the programme, the Bank will be indemnified by the Treasury. This
programme will come into effect from 2 February. The programme also provides a
framework for the Monetary Policy Committee of the Bank of England to use asset
purchases for monetary policy purposes should the MPC conclude that this would
be a useful additional tool for meeting the inflation target. In such
circumstances, the scale of the scheme could be expanded, a further announcement
would be made.
Further details of the arrangements for the Asset Purchase Facility will be
set out in an exchange of letters between the Chancellor and Governor before the
end of January.
Asset protection scheme
To provide certainty and confidence to banks in their lending, the Government
is today announcing its intention to offer capital and asset protection on those
assets most affected by the current economic conditions. This will reduce banks’
uncertainty about the value of past investments, so providing them with greater
confidence to lend in the future to creditworthy businesses, homeowners and
consumers. The Government is publishing a separate notice setting out the
outline terms of the scheme. The Government will make a further statement on
the details of the scheme by the end of February.
In addition, to address any potential uncertainty and to mitigate unintended
pro-cyclical effects, the FSA is today publishing a statement clarifying its
expectations around bank capital ratios. The FSA’s statement makes clear that
there are no new statutory requirements for capital and that it sees the capital
buffers built in as part of the recapitalisation exercise as playing a role in
both withstanding losses and facilitating continued lending. The FSA’s statement
is consistent with the statement by the Basel Committee on Banking Supervision
issued on 16 January.
In the longer term, the Government and the FSA believe that it would be
preferable for the capital regime to incorporate counter cyclical measures which
lead to banks building up buffers in good years which they can draw down during
economic downturns, and the FSA and the Bank will be strongly supporting the
work by the Financial Stability Forum and Basel Committee in this area.
The Government will also continue to collaborate internationally with to
stabilise and strengthen the global financial system, ahead of the London Summit
on 2 April.
The Government will continue to take all necessary measures to ensure the
stability of the financial system, ensure lending to the economy, businesses and
homeowners, and limit the depth and duration of the current recession and
support the subsequent recovery.
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Article Published/Sorted/Amended on Scopulus 2009-01-19 12:30:48 in Business Articles