From HMT:
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 between banks;
* 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 assets;
* 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.
We highlight the principle three new government measures (others include expanding Northern Rock and lengthening liquidity ops at the BoE):
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.
The basic idea of the CGS expansion seems to be to kick start the UK securitisation market, and with it, revive mortgage origination and the housing market.
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.
This scheme is potentially the broadest and most significant. We gather that the gist of it is to support banks capital ratios by wrapping troubled structured credit securities. Rather like monoline insurance - or that written by AIG. The point being that wrapped ABS securities will have minimal risk weightings under the Basel II framework. The scheme is effectively a more sophisticated take on the “bad bank” idea.
The key question for UK banks is eligibility. Or specifically, whether banks like Barclays and HSBC - who have hitherto not taken government capital - will be allowed to participate in the benefits of the scheme.
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.
This is basically what Ben Bernanke called “credit easing” last week in his speech at the LSE. It’s what Willem Buiter has called qualitative easing. Interestingly though:
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.
It appears that concerns about the independence of the MPC are unfounded.
