Why is the UK government opting to swap the banks’ mortgage nasties for gilts rather what everyone really wants, cash?
To avoid the impression that they’re giving the banks money, we assume. Repeat after Mr Darling: this is not a bail-out. This is lending. This is an attempt to “unbung” the banking system, he told Andrew Marr on Sunday. [Fast forward to the 38th minute, after Plaid Cymru, George Osborne, Jeremy Irons and Billy Bragg have had their say].
So instead the banks are to be offered £50bn of short-dated government bonds, in exchange for their mortgage-backed securities. The latter will be handed over to the Bank of England for up to three years, at a “haircut” designed to compensate the central bank for the risk it is taking on and protect it from falling house prices and future declines in the value of these securities.
How does this compare to facilities in the US? The TSLF, which similarly offered Treasuries for ABS, was shorter dated at 28 days and directed specifically at primary dealers. In the general rush by banks for funds, that facility has been notable for the soft demand it has drawn. The UK variant in offering the facility for three years may generate more room for manoeuvre.
There’s an element of smoke and mirrors here. In offering gilts for RMBS rather than cash, argues Willem Buiter, the authorities are introducing an unwelcome lack of clarity. Those banks that find themselves with excess gilts can sell them on, either to other private parties with excess liquidity, or more likely to the Bank itself.
The banks can effectively force the Bank of England to buy their excess gilts, because the Bank of England is committed to keep the overnight rate in the interbank market close to the official policy rate….By acting to reduce their reserves with the Bank of England (because they have liquid government securities coming out of their ears) the banks will put upward pressure on overnight rates. The Bank of England will have to offset this (as they try to peg that rate at the level set by the MPC) , and it will neutralise the effect on the overnight rate by making collateralised loans to the banks.
The government has broadly indicated that it will expect such generosity to be matched by better disclosure of losses by the banks, a process it could usefully start by detailing at what discount the Bank of England will be taking securities off the institutions’ hands.
Suggestions that £50bn will save the housing market is on the face of it laughable. Reports that there may be a further £100bn forthcoming doesn’t do much more to inspire confidence. But this is all about making everyone think the housing market is saved, whether or not that would in fact be a good thing.
To get things moving these would need to be genuinely new funds. It remains unclear to what extent, if at all, the bank will reduce funds going into the system through other channels.
Moreover, the banks would need to start lending. But the government only wants banks to lend correctly – in the appropriate, responsible way. They want banks’ new-found flexibility to be directed towards prudent, deserving homebuyers, especially those politically appealing first time buyers.
They are unbunging, not offering up cheap funds for new business exploits. So there’s a cut-off date likely for the securities that the banks can pledge to the new facility. In reality, notes Robert Peston, the big banks that have access to this standing facility will need to be cajoled to share the goods, with their smaller, cash-constrained comrades, and the general public.
More details, including the ins and outs of keeping the non-bailout off the national books, are set to land at 9am.
Related links
Let Britain’s housing bubble burst – Martin Wolf
Darling to reassure taxpayers over lenders’ bailout – FT.com