That’s UBS’s assertion, in a note published yesterday on the BOE’s Special Liquidity Scheme (SLS) and UK Banks (FT Alphaville would add Gordon Brown to that sentence, after today’s housing stimulus measures):
[American cop shows] need ‘jeopardy’ before each commercial break - maybe the hero is about to open a door that looks like a door previously shown to open into a room full of armed desperados. After the advertisements for soap powder and shampoo, we return to the hero opening the door and finding either the desperados or, preferably, some old school friend who turns out to have vital evidence to solve the vexing case on which he is working. The SLS has many of these elements, in our view.
Brown’s announcement is coming just in the nick of time for UK banks, or so he thinks. Banks are facing a potential £200bn overhang of funding when SLS comes to an end in three years’ time, according to UBS. It’s closed to new applications from October:
… The governor recently reiterated that the facility will not only be closed but, more importantly, it will not be extended. That is, the UK banks will then have perhaps £200 billion of ‘exploding’ funding. Where exactly are the banks going to find £200 billion in term funding within the next three years (before the SLS expires), in addition to that needed to support the maturity of their existing medium- and long-term bonds?
By making a figure so large the focus of the markets, does it not seem likely that the Bank will be making any future return to the market by the banks particularly problematic, as any opening of the term funding markets will inevitably be followed by such colossal supply? For if the banks know everyone knows that they have this much funding maturing within three years, they will likely feel compelled to refinance it well ahead of that, and it would seem likely at present that the structured credit markets are unlikely to be looking for £200 billion in incremental UK mortgage exposure within the next two years.
That’s something lost on Brown, who advocates stamp duty reductions (exempting properties woth less than £175,000 from the tax) to help boost the number of first-time buyers. Bank stocks have duly risen this morning in London, with HBOS up 0.6 per cent, Barclays up 1 per cent, Lloyds TSB up 2.3 per cent and RBS gaining 1.8 per cent. Developers gained more, with Taylor Wimpey rising 8 per cent and Persimmon up 6.9 per cent.
Still, as Lloyds economist Kenneth Broux notes, with average UK house prices at about £219,000, the stamp duty may not have that wide an impact. The root of the current crisis is indeed a reluctance of banks to lend. Extending the SLS then, if possible, might be a better solution.
As Mervyn King noted:
The SLS was designed in…an atmosphere of tremendous uncertainty in the financial markets; there was a period… when almost any bank could be thought to be at risk from …[a] loss of confidence among their counterparties. The SLS is designed to restore confidence in the banking system so that banks contemplating dealing with other banks will know that those banks can obtain access to liquidity when needed.
Those conditions argueably still exist. Brown’s efforts today may just be creating more uncertainty.
Further reading
Nationalise mortgage lending - Stumbling and Mumbling
