主播大秀

No mortgage rescue

• Robert Peston
• 21 Apr 08, 05:38 PM

It was the money-market mayhem in March, when the US investment bank Bear Stearns came within a whisker of running out of cash, which persuaded the Bank of England that it had to provide more financial help to banks.

At the time, the Governor of the Bank of England, Mervyn King, became concerned that almost any bank could be brought down by a combination of vicious market rumours and the difficulties all were experiencing in obtaining funds.

So the is effectively a statement that it won't let any well-run bank collapse because of a temporary problem finding cash.

But the Bank is adamant this doesn't mean Northern Rock would have been saved, had the scheme been in existence last summer - because it was, in the Bank's view, badly run. It would not therefore have been allowed to swap billions of its mortgages for Treasury bills.

The banks I've spoken to are hopeful that the Bank of England's initiative will strengthen them and reduce the risk that another one will bite the dust.

But, in spite of what certain politicians and analysts seem to believe, this initiative was not designed to reduce the cost of mortgages or significantly increase their availability.

So both the banks and the Bank of England are explicit that the cost of credit for many of us, relative to the official lending rate, will continue to rise.

• Permalink
• Comments (0)

Banks' big bailout

• Robert Peston
• 21 Apr 08, 10:07 AM

The has rewritten the rules of how it provides help to the banking system.

First, the scale of the financial support it's providing is immense. It says discussions with the banks suggest they will initially swap about 拢60bn of their mortgage assets for nine-month bills worth around 拢50bn. But the banks tell me that in the coming months they expect the swaps to rise to well over 拢100bn

In other words, the Bank of England is becoming the market for mortgage-backed securities. This is a banking-market bail out of an ambition we haven't seen in this country since the early 1970's and possibly longer than that.

Also, this is no quick fix. The Bank of England is no longer hoping that all will be back to normal in a matter of days or weeks. The support will remain in place for three years.

The scheme is so substantial that the Bank of England has had to be indemnified. So taxpayers will be at risk.

But the primary purpose of this scheme is to prevent another Northern Rock. Or to put it another way, taxpayer support is being provided to minimise the risk of huge future losses for taxpayers from another banking collapse.

It's a crisis measure to prevent the mess in money markets precipitating further financial calamity and a very serious economic downturn.

But it won't lead to a sudden re-awakening of banks' desire to lend as much to us as we want as cheaply as we want. Credit will remain relatively tight.

And don't expect the downward trend in house prices to be reversed.

UPDATE 10:40: I forgot to mention that banks can also swap their credit card loans for the Treasury Bills - which underlines the magnitude of what is being attempted here.

As expected, all these loans - mortgage ones or credit-card receivables - will have to be converted into AAA-rated securities before they can be swapped for Treasury paper. But that's a relatively straightforward technical process.

But all these mortgages and other loans will only be eligible for the swap if they were made before the end of last year - because the bank does not want to use public money to stimulate new lending, only to replace the funding that disappeared when money markets seized up last August.

UPDATE 11:44: If this liquidity scheme had been in existence last summer Northern Rock would not have been saved by it - or so the authorities are saying. Why? Because it was too dependent on the sale of mortgage-backed securities, in the Bank of England's view.

Or to put it another way, its business model was too risky - and therefore the Bank of England would not have given it access to the mortgage-for-bonds swap (even though the Financial Services Authority was desperate for the Bank of England to provide just such a bail-out).

• Permalink
• Comments (0)