We’ve had the SLS, the HM Treasury Credit Guarantee Scheme (CGS) and the Bank Recapitalisation Fund; so what next for the great British banking sector?
While the idea of ‘bad bank’ is being batted around, and is providing support for the share prices of Barclays, HBOS, Lloyds TSB and RBS, industry watchers are sceptical it will get loans to where they are most needed.
They think the biggest problem is not that banks aren’t lending, but the partial withdrawal of building societies and non-domestic banks (particularly in the mortgage market) which account for around a third of UK loans.
In that light, Jonathan Pierce of Credit Suisse reckons the next initiatives from the government will focus on getting UK banks to write more business. He sees two ways this could be done:
Funding – extend the CGS to include asset backed securities and also a move to increase the duration of guarantee from three to five years.
Capital ratios – HM Treasury provides some sort of indemnity against deep credit tail risk.
Here’s his thinking.
It seems likely that the Treasury will announce a collection of initiatives to kick start lending in the next few weeks. However, such a plan is likely to lack any capital raise in our view. Rather, we believe it will centre on ensuring banks have access to funds at sufficiently long durations to encourage new lending, while protecting capital bases through a reduction in procyclicality and the transfer of credit tail risk to the Government. This would leave the Government providing unfunded liquidity assistance (unless banks actually default ? less likely if credit availabilty improves) and unfunded credit protection (unless there is a very severe credit event).
Ultimately the success of any plan will be determined by the flow of new lending, and that should be visible quite quickly. Indeed, we will continue to publish our Credit Suisse Credit Availability Monitor over the coming weeks (currently languishing at record lows).
And Mr Pierce could be on to something, as this report shows:
LONDON (Dow Jones)–The Bank of England will not extend its Special Liquidity Scheme beyond January 30, sources familiar with the situation said Monday. However, the SLS, which allows banks to swap illiquid mortgage assets for U.K. Treasury bills, could be replaced by a broader new mechanism aimed at addressing the longer-term funding problems that banks face, the sources said.
Related link:
Lloyds Banking Group – ‘Yours, taxpayer’ - FT Alphaville