The demise of Lehman Brothers a year ago sparked a collapse in financial market confidence and set of a series of reactions that have spread hardship into the four corners of the globe.

Reuters News has charted the key events and their impact in "Times of Crisis" -- a major new multimedia production on Reuters.com. (See it here.)

We'd like to add the experiences of Reuters readers. So, if you or your family have been affected by the events of the past year then use the comments section below to share your story.

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Barclays’ and HSBC’s interim results are a study in contrasts. Barclays has used the credit crunch to make a bet-the-farm move into the investment banking big-league, a bet that has so far paid off. HSBC, in comparison, chastened by its flawed move into the U.S. subprime market, has returned to its conservative roots.
John Varley, Barclays’ chief executive, gives the usual guff about “staying close to our customers and clients”. In truth, Barclays’ 3 billion pounds of profit in the first half owes much more to its investment banking division, enlarged by its opportunistic acquisition of Lehman Brothers’ North American unit last autumn, than to its traditional banking businesses.
Barclays Capital (BarCap) more than doubled revenues to 10.5 billion pounds, and doubled pre-tax profits to 1 billion pounds. As with rivals, the star performer was fixed income, currencies and commodities where banks are profiting thanks to their access to very cheap central bank funding.
This is just as well, because Barcap is still carrying plenty of toxic assets left over from the credit boom. These cost it 4.7 billion pounds in gross writedowns and impairments in the first half. Given that it still has other dodgy exposures, including assets worth more than 7 billion pounds guaranteed by ailing monoline insurers, further losses seem likely. Barclays cannot rely on other parts of the bank to come to its rescue: profits in traditional retail and commercial banking businesses all collapsed as impairments soared.
HSBC’s global banking and markets (GBM) division also delivered a record performance, more than doubling its first-half profits, to $6.3 billion. However, HSBC has long resisted the charms of investment banking, and runs GBM as a complement to its existing global commercial banking franchise. Despite the juicy returns currently on offer, this is unlikely to change.
HSBC has its own sizeable bit of historical baggage in the form of Household, the U.S. consumer lender that is now being expunged from the record, though not without considerable additional losses.
Many suspected that HSBC would use its bumper $17.8 billion rights issue this spring to acquire divisions of ailing rival banks at bargain basement prices. So far, it has resisted, instead bolstering its tier 1 capital ratio to 10.1 percent.
Rather, it is building on its position as the world’s leading international bank (especially now with Citi holed under the waterline) organically. While cash-strapped rivals retreat from China, HSBC is investing in its Chinese operations. It has been the first international bank to settle cross-border trade in renminbi (yuan). It is on track to have 100 outlets, including many in rural China, by year end, more than any other international bank. Such loyalty will not go unnoticed in Beijing.
Which bank is better positioned for the new environment? That depends partly on the speed of the recovery. Barclays has so far performed a dazzling high-wire act, avoiding state capital by spreading its losses over a number of years and by selling its Barclays Global Investors arm. But this is hard to sustain if the downturn turns out to be prolonged. Meanwhile, once banking conditions return to normal, central banks will cease to flush investment banks with cheap cash and investment banking profits are bound to tumble. The HSBC tortoise looks set to leave the Barclays hare far behind.

-- James Saft is a Reuters columnist. The opinions expressed are his own --

The U.S. faces a lengthening series of request from industries and interests seeking shelter under the Troubled Asset Relief Program, most of which it should dismiss out of hand.

YRC Worldwide, a large trucking company, told the Wall Street Journal it will seek $1 billion in TARP funds to help relive it of its pension obligations.

YRC said that about half of the $2 billion it will owe in pension payments over the next four years covers the costs of retirees who worked not for it but for other companies, now vanished, that are part of a multi-employer pension plan.

That's certainly an irony but doesn't seem to be the basis for a claim on the public purse.

YRC is not systemically important and its pension woes, presumably the result of negotiation and free agreement, must be its own responsibility.

Next up: states and municipalities.

California Treasurer Bill Lockyer has asked Tim Geithner to provide assistance under the TARP, warning of a hit to public services and infrastructure if the money is not forthcoming.

Lockyer wants the TARP to provide insurance to banks who themselves provide insurance backstopping California's short-term borrowings. That insurance would cover the banks in the event of a default by California making the deals a surefire moneymaker for the banks.

Lockyer says that because of the credit crunch the banks are imposing too high fees for their letters of credit. That is true, but only up to a point.

The real issue is that California, because of the recession and its own decisions about taxing and spending, is not a particularly good bet.

While California is most certainly systemically important, and while keeping government spending ticking over in a recession is arguably a good thing, this plan is not the way to do it.

As proposed, it is a subsidy to California and to the banks, or in other words one subsidy too far. Like so many other of the government actions during the crisis, this short-circuits market discipline and encourages risk taking in search of private gain but with public insurance.

If the U.S. wants to bail out California, by all means do it, but take responsibility for the decision and do it directly.

-- At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. --

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

When foreign strategic investors were invited to take stakes in Chinese banks, the word "strategic" had a clear meaning for their hosts.

The banks were supposed to stay in for the long term, and that's why they had the chance to buy big stakes at bargain prices. Yet many have behaved like "foreign speculative investors", as they are now called in China -- they took the cheap deal and then flipped the shares for a fast profit.

Chinese banks looked to the West for access to capital, risk management and exposure to fast growing and sexy new products. But now China no longer needs as much foreign investment.

Meanwhile some of the fancy new financial products China once craved have turned out to be toxic, and the risk management skills of the so-called teachers from the West look tarnished in the wake of the credit crunch.

The recent exodus by cash-strapped Western banks such as RBS, BofA, and UBS, all of whom sold out of Chinese banks for fat profits, has left behind a sour taste.

LAST OF THE BIG 5

Beijing should reflect on this as it prepares the last of the big 5 state-owned lenders to go public. Does the Bank of Agriculture really need strategic investors at all?

And if so, should it exclude local strategic investors, as the other Chinese banks did, in the name of attracting foreign capital and expertise?

There are strong arguments for changing tack. If foreign banks haven't really delivered the goods, there is little point in bending over backwards to secure their involvement, especially when only a handful of Western banks can afford a substantial investment in AgBank.

With assets of 7 trillion yuan ($1 trillion) it is the second largest bank in China. It would therefore make sense to open the door for domestic companies to bid for Agbank's shares.

There would be no shortage of interest. Chinese financial institutions have some of the strongest balance sheets in the world and are eager to find new investment targets.

Domestic commercial banks are unlikely to get a stake at AgBank for competition reasons, but China Investment Corp. (CIC), the Social Security Fund and China Life could be interested.

CIC already owns half of AgBank through Central Huijin, its wholly-owned subsidiary. While it would not necessarily bring AgBank much in terms of banking technology or risk management, an investment would allow China to use its reserves to fund domestic investment.

China Life, on the other hand, could be an partner as well as an investor. Chinese banks have become a vital distributor of insurance policies. AgBank can help China Life tap into a market of 700 million farmers, equal to twice the U.S. population.

Chinese financial firms all have ambitions to become financial conglomerates, and a strategic investment will help China Life, and probably AgBank too, get closer to that goal.

Of course, just because you stop favoring foreign investors doesn't mean you should start favoring the locals. The right answer is to favor no-one.

That would allow real price competition for the shares, meaning that the most likely winners would be those institutions that most valued the relationship. Moreover, a proper competition would not leave too much money on the table and would be fair for future common investors.

OLD THINKING

That said, the powers that be still seem to be hung up on old thinking. Despite the credit crunch, Western banks are still regarded as superior by many in China. Xiang Junbo, the chairman of AgBank, said in a recent interview with Asian Banker that he still believed foreign strategic investors would bring "advanced concepts, risk management models and microfinance experiences."

Yet it is far from clear that sophisticated Western institutions have that much to teach AgBank, which is dealing with a large, relatively poor clientele. For instance, if AgBank really wants to learn about microfinance, it would probably do better to engage microfinance pioneer and Nobel laureate Muhammad Yunus as a consultant rather than, say, to bring in the French bank, Credit Agricole, as a shareholder.

To use a Chinese idiom -- Chinese banks and their foreign strategic investors have been sleeping in the same bed but dreaming differently. The Chinese hoped to learn from the Westerners but never fully trusted them, while the Westerners planned to use the partnership to build their own franchise in China. The credit crunch has merely laid bare these differences.

TIGHTER SELECTION CRITERIA

Facing the backlash against foreign investors, Xiang said he would tighten the selection criteria applied to foreign investors, probably extending the lock-up period from three to six years. Foreign bidders for a stake in AgBank must be financially strong, and be experienced in agriculture, rural area business and microfinance loan extension, he said.

This has effectively weeded out almost all Western interest, leaving China with limited negotiating power -- surely another argument for widening the net to domestic bidders.

AgBank does not need a foreign sugar daddy to get its IPO away. True, it has traditionally been the weakest among the big five state-owned banks for a good reason: AgBank shoulders a social responsibility to lend to the largest disadvantaged group in the world. But as the success of microfinance in Bangladesh has demonstrated, lending to the rural poor can be a lucrative business if it is done well.

AgBank reckons that the profit of lending 1 billion yuan in rural areas is equal to lending 1.6 billion in urban areas, because it can command a higher interest rate.

China is focusing on boosting rural demand, and AgBank can benefit from this process. The land reform will give the rural population more rights over the land.

As this happens they will be able to borrow more money using land as a collateral -- something that should boost lending. That is a good story to tell public investors. Gone are the days that Chinese lenders need a foreign label to help sell shares. The AgBank IPO is a chance to drive home this point.

-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --

By Margaret Doyle

Barclays has avoided the dead hand of state shareholding and, on Thursday's evidence, it looks as though it will escape completely.

Barclays Capital has enjoyed a storming first quarter -- so good it is hard to see it being sustained -- which has allowed the bank to make more big write-downs and still report a 15 percent increase in pre-tax profit.

The key question is whether its provisions against so-called level 3 (hard to value) assets are sufficient.

On the face of it, they do not appear to be, because they have provided for a write-down of 24 percent on an alphabet soup of American junk assets. That compares to a write-down of 75 percent taken on a bunch of similar assets by Societe Generale, which unveiled an unexpected first-quarter loss.

Both bought insurance against a deterioration in the value of these assets, in Barclays' case, 27 billion pounds-worth, from "monoline" insurers.

Analysts have questioned the value of such insurance, as the survival of the monolines themselves has been called into question. Barclays' defence is straightforward: it says the likelihood of being hit by both a default on the underlying asset and on the insurer is very low. And it is taking more write-downs with each quarter's results.

But are these haircuts just big enough to be comfortably covered by Barclays' profits? Is it simply trying to earn its way out of the credit crunch?

It is, of course, in Barclays interests to play a long game. It gave Middle Eastern state investors great terms on a capital injection last autumn in order to avoid having Her Majesty's Government on the share register.

I-shares, only recently considered to be a core asset, was also ditched in order to help it pass a British stress test. Had it failed, it would have had to buy insurance on punitive terms from the government.

Shareholders have bought the story. The stock price has risen six-fold from its January low. Whether it will continue to rise depends on whether BarCap can continue to turn in profits faster than its American junk goes bad.

Hector Sants, Chief Executive of the Financial Services Authority, has agreed to take questions from Reuters readers after he delivers his first major speech on the future of financial market supervision on March 12th at the Thomson Reuters Building in London.

Sants, who was appointed just before Northern Rock was plunged into crisis, said last month that fresh thinking was needed in financial market supervision, pledged to get more involved in assessing the competence of senior bankers and waived his entitlement to a bonus for last year amid criticism of the FSA’s performance.

So what should the FSA do to sort out the banks and the markets? Reuters columnist Jim Saft gives his assessment of the challenges facing the regulator:

Thomas Raber, Managing Director of Alvine Capital, sees changes to the regulation of hedge funds as important:

Send us your questions via the comments section below or if you’re on Twitter use the #askfsa tag and we’ll try to get as many of your questions answered as possible. See the Great Debate twitter site to follow other debates hosted by Reuters.

Davos is a well-rehearsed event and everyone knows the part they should play. Business and political leaders gather each year to tackle the major challenges of a global economy while the rest of the world, or those of its citizens who are interested, look on from afar. But this year, for obvious reasons, things are different. The notion of leadership has been coupled in the public mind with that of responsibility. The tone here is a little more humble and the attitude more open-minded. There's a recognition that new thinking is required.  A suitable time, perhaps, to turn the tables on convention and have Davos delegates ask the questions they can't answer and for global citizens to offer solutions.

Gamefully opening the discourse is Professor Klaus Schwab, Founder and President of the World Economic Forum.

If you've got suggestions for Klaus then use the comments section below.

-- John Kemp is a Reuters columnist. The views expressed are his own --

The international system of bank regulation, epitomised by the Basle II process and the light-touch principles-based regulation of Britain's Financial Services Authority (FSA) has comprehensively failed.

In too many instances, light-touch principles-based regulation with an emphasis on banks' internal risk controls turned out to be no effective regulation at all.

Former Fed Chairman Alan Greenspan was the most prominent proponent of this approach, which relied on the profit-maximising self interest of financial institutions to limit risk-taking to prudent levels.

In this view, bank leaders themselves could be relied upon to manage their institutions prudently -- after all bankruptcy is not in the interest of shareholders. Previous bank failures (such as Barings) were the result of failure to measure risks properly, or failures of internal communication and control.

So the job of regulators was to set out principles and ensure banking institutions had adequate internal systems and controls, then allow senior management to ensure the overall level of risk was prudent.

This reliance on internal risk-management systems has proved to be a huge error. As Greenspan himself noted recently, bank leaders had not acted in the careful manner he had expected when he pushed for them to be freed from the old, more restrictive regime.

As a result, credit control will be much more intrusive in future. As noted in a companion column, there is renewed interest in some form of overall credit policy to limit the quantity of credit (and debt) within the economy and ensure it is consistent with macroeconomic stability.

But intensive contra-cyclical credit controls will only work if they are imposed on a broad range of institutions and on a worldwide basis -- otherwise the banking system will arbitrage between regulators, and business will be booked in the jurisdiction with the "lightest touch".

This is precisely what happened in the last decade, when the FSA, and the Commodity Futures Trading Commission (CFTC) in the United States, arguably led a race to the bottom among regulators to offer the most generous regime in the hope of creating a competitive advantage for their home jurisdiction and winning more business.

So any new credit control instruments will need to be implemented on a multilateral basis and agreed through the Basle Committee on Banking Supervision, in tandem with the Madrid-based International Organisation of Securities Commissions (IOSCO).

The Basle Committee's updated Capital Accord (Basle II) has already been rendered moot even before it has been fully implemented. Basle II's decision to allow banks to rely on their own complex internal risk control systems when judging how much regulatory capital they need to hold now looks quaint. Of the three pillars in Basle II -- (1) capital requirements, (2) supervisory review, and (3) market discipline -- the third now looks wholly outdated, and elements of the first and second need substantial re-working.

Some form of Basle III will be needed to buttress the contra-cyclical credit instruments which national regulators and central banks will deploy to manage the credit cycle and limit debt to GDP ratios to more safe levels.

Basle III needs to settle on an agreed range of credit instruments and credit-creating institutions that will be subject to regulation, how regulation will be applied on a counter-cyclical basis, the respective roles of supervisors and bank management, and how to ensure against regulatory arbitrage.

BANK REGULATION AND MONETARY POLICY
The failure of Basle II process bank regulation at multilateral level has been matched by failure among national regulators. The events of the last 18 months have demonstrated that a credit-fuelled banking crisis cannot be contained within the financial sector and has potential to destabilise the rest of the economy severely. Credit policy is a matter of macroeconomic strategy, not just financial regulation.

If credit expansion has the potential to destabilise the real economy, and the liabilities of much or all of the financial system are contingent liabilities of the central bank and the finance ministry as lenders of last resort, then the quantitative control of credit is arguably too important to be left to a financial regulator, such as the FSA or the U.S. Office of the Comptroller of the Currency (OCC) and U.S. Office of Thrift Supervision (OTS).

Quantitative credit control needs to be brought within the remit of the central bank, so that credit expansion can be adjusted in tandem with interest rates (and indirectly in response to changes in government fiscal policy) to ensure internal, external and financial balance simultaneously.

While banking regulators may still have a "tactical" role in supervising prudential management and risk controls within individual institutions, the "strategic" role of limiting credit extension across the financial system as a whole to a safe level is too important, and properly belongs to the macroeconomic managers at the central bank.

Recent regulatory trends have seen institutional responsibility for financial regulation dispersed across multiple institutions, and separated from monetary policy at the central bank. This trend may now have to be reversed.

A more consolidated and intensive approach appears inevitable. Proposals to combine the various US regulators or at least to give the Fed over-arching responsibility as a super-regulator for the financial system have received widespread support, though the details of institutional reform have yet to be agreed.

In the United Kingdom, the wisdom of separating financial regulation from the Bank of England and passing responsibility to the FSA is increasingly questioned. The need for a lender of last resort support to a wide range of institutions, and the macroeconomic consequences of a widespread debt crisis, have pushed the Bank of England back into the heart of financial regulation.

If a new instrument for controlling the quantity of credit is eventually implemented, it will probably have to be managed out of the central bank. The FSA may retain responsibility for the prudential supervision of individual banking institutions, but the overall framework of control will need to be set by the central bank.

EMERGING REFORM AGENDA
If proposals for regulatory reform are to stand any chance of being implemented, they will need to move beyond a sterile debate over market-led discipline and innovation versus stodgy heavy-handed state regulation.

They will have to recognise that collective action problems and moral hazards in the credit creation process make some form of quantitative control essential. The system needs to achieve a financial balance alongside internal balance and external balance, and for that it needs to develop a third instrument, credit policy, alongside the traditional monetary and fiscal policies.

Credit policy will need to act directly on the volume of credit created, and amount of risk, independently of its price, which is the province of interest rates and monetary policy.

It will need to be contra-cyclical and apply to a broad range of institutions to be effective.
It must be dynamic, capable of being modified as the financial system evolves and pioneers new ways to circumvent the existing controls.

It must also be applied on a multilateral basis to prevent the type of regulatory arbitrage which occurred in the late 1990s and 2000s.

The Basle Committee is the most promising forum for reaching agreement. But Basle III will need to be developed much more quickly than Basle II, which took more than a decade, has still not been implemented fully, and risks becoming a stillborn historical curiosity, a monument to an age which has passed.

That suggests Basle III should focus on a much simpler set of credit control instruments, and eschew complexity in favour of a blunter but more effective approach. Crude but effective safeguards may be preferable to interminable arguments and theoretical elegance.

-- John Kemp is a Reuters columnist.  The views expressed are his own --

UK Prime Minister Gordon Brown's call today for a new G20 charter of principles on financial regulation  reflects an emerging consensus among policymakers that, once the immediate crisis has passed, the regulatory framework must be fundamentally redesigned.

In particular, policymakers are concerned with how to correct the basic moral hazard problem in which bankers have an incentive to extend too much credit, while private firms and households have an incentive to take on too much debt.

A consensus is emerging that the volume of credit expansion needs to be restrained and managed as a separate policy objective. This marks a sharp break with past practice -- in which central banks attempted to control the cost of credit by manipulating short-term interest rates, but have increasingly left its quantity to decisions by individual banks and borrowers.

There is also something of an emerging agreement that if credit control is a separate economic objective alongside "internal balance" (output-inflation) and "external balance" (trade and capital flows) then a new instrument needs to be developed to achieve this target.

With three targets (internal balance, external balance and financial balance) Tinbergen's Rule says there need to be three independent policy instruments -- fiscal policy, monetary policy, and a distinct credit policy.

In his recent speech to the CBI Annual Dinner in the East Midlands last week, Bank of England Governor Mervyn King alluded to the need to develop a new policy instrument to achieve credit-policy objectives. He stated a strong preference it should not be interest rates. King argued rates should continue to be used to target output and inflation.

The clear implication is the "new policy instrument" referred to by King will have to be some form of direct quantitative control, so as not to interfere with interest-rate strategy, and allow the authorities to manipulate the volume of credit for any given level of interest rates.

SECOND GENERATION CONTROLS
In 1945-1975, banking crises were few, but credit was expensive and unavailable to many households and businesses. The banking system was tightly controlled and the quantity of credit was rationed through a variety of direct mechanisms (reserve requirements, intensive bank examinations, margin requirements and a host of other direct lending controls).

Most of these were dismantled during the 1980s and 1990s. They could be resurrected but this would face stiff opposition from within the industry. It would also face hostility from within the economics establishment (broadly in favour of market solutions) and among politicians (worried about the impact of reduced access to credit for many households, and voters, in the lower half of the income distribution).

Fed Vice-Chairman Don Kohn and Prof Lawrence Summers (now head of the Obama administration's National Economic Council) both poured scorn on what they saw as a rose-tinted view of the heavy regulatory past at the Fed's annual Jackson Hole symposium in 2005. Both men are presumably chastened by the subsequent meltdown. But their personal opposition to intensive quantitative controls is probably still intact, and shared by many policymakers at the top of the new administration, in Congress, and among the wider regulatory community.

So the search is on for a compromise. The idea is to create a new instrument or instruments that would work with the grain of the market, rather than cut against it, and enable regulators to exercise some control over the quantity of credit being extended while preserving flexibility for banks to innovate.

If the old pre-1980 quantitative controls are seen as "first generation" methods, the hunt is on for more sophisticated market-friendly "second generation" methods that promote stability while protecting growth.

The first design issue for these new quantitative controls is whether to impose them directly or indirectly.

First-generation quantitative controls were formulated within the central bank and consisted of a series of prescriptive lending ratios.

The trend in recent years has been towards a more indirect approach, in which the central bank and other regulators set out general principles and a flexible framework; banks are then free to manage their business and risk-taking within this. One key question is how far second-generation controls will build on the modern principles-based indirect approach, or revert to a more prescriptive command-and-control one.

COUNTER-CYCLICAL INSTRUMENTS
The second design issue is how to make quantitative controls "active" rather than "passive". First-generation controls were largely specified in passive terms: fixed capital and lending ratios that were invariant over the cycle. But there is an emerging consensus second-generation controls should be more active and capable of varying over the cycle, limiting credit growth during the expansion phase, but also mitigating the collapse of credit during a contraction.

Contra-cyclical bank regulation policies are especially popular at the moment, because the industry is in the contraction phase, and contra-cyclicality implies a loosening of policy. The real challenge is to create a contra-cyclical approach that is sufficiently robust it can compel the banks to increase their capital cushions during an upturn.

One option is to impose reserve requirements or risk-weightings which rise above the long-term mean during expansions and are allowed to fall below it during the contraction phase. But that raises thorny questions of who measures the cycle and how. Dating and measuring business and credit cycles, and identifying turning points are notoriously difficult in real time.

To take a recent example: the start of the most recent expansion is controversial, with many commentators now arguing the Fed missed the beginning of the upturn and failed to raise interest rates in a timely manner. If the Fed, or another regulator, had been responsible for adjusting reserve requirements or risk-weightings, as well as interest rates, would the adjustments have been any more successful?

If relying on regulators' discretion to identify turning points in the credit cycle is problematic, is there a way to make contra-cyclical controls endogenous to the lending system?

The aim would be to make reserve requirements, risk-weightings or other instruments depend on the volume of credit extended in the immediate past period(s). Credit controls would be progressively tightened the longer and faster credit expands, and progressively loosened the longer and further credit falls.

The problem with endogenous credit control policies (like endogenous interest rate policies) is that they do not work well around cyclical turning points.  In the summer of 2007, an endogenous contra-cyclical policy would probably still be tightening conditions in response to the explosive credit growth in 2004-H12007 rather than loosening them to forestall the calamitous collapse of credit that occurred later in the year.

INSTITUTIONAL REACH
In practice, credit is hard to define, measure and restrict. Conventional bank lending is only one element of an increasingly complex and diverse credit-creating system.

Finance companies, commodity brokers, special investment vehicles, and even hedge funds, all of which are increasingly active in wholesale money markets, may be engaging in credit-creating processes.

The question of what types of credit to control is analogous to the debate during the 1980s about what measure of the money supply to target. Moreover, Goodhart's Law suggests any statistical or economic relationship between the chosen target measure and the wider economy will tend to break down once pressure is applied for control purposes.

In fact, as soon as the authorities decide on which forms of credit are subject to regulation and control, there is an immediate incentive to create other forms of credit in other institutions that are not subject to control and therefore more profitable. This was precisely the reason for the huge growth in the "shadow banking system" during the 1990s and 2000s.

To have any chance of being effective, the new credit policy will need to cover the whole range of institutions which create credit, not just commercial banks, and need to be applied on a fairly international basis, to prevent this sort of institutional and jurisdictional arbitrage.

Melanie Bien, director, Savills Private Finance, is a guest commentator. The opinions expressed in this commentary are her own.

It is too early to say whether the latest bank rescue plan will have the desired effect of persuading the banks to start lending again. But it is a step in the right direction and we welcome it as a positive move as it may just remove the remaining stumbling blocks to getting the credit and mortgage markets functioning properly once more.
Clearly, something further had to be done. October’s £37bn bank recapitalisation did little to persuade banks to regain their appetite for lending. Credit continues to be difficult to come by – unless you have a large deposit or equity in your home and a clean credit history.

The latest bailout aims to guarantee lending and insure banks’ bad debts, such as sub-prime lending in the US. The idea is that banks won’t need to hold back vast sums in case of default on loans – something they have been doing until now. What is particularly encouraging is that this is a comprehensive package of measures which taken together is likely to have more of an impact on increasing new lending than addressing one area at a time.

The new £100bn mortgage guarantee scheme to underwrite lending between banks and financial institutions as recommended in Sir James Crosby’s report, is perhaps the most significant development. Before the credit crunch hit, the securitisation market was a key source of funding for the mortgage market, responsible for a third of all lending. This scheme should help rejuvenate the securitisation market, which has all but closed.

There is a danger that it may prove to be too restrictive, however, as only AAA-rated securities are covered.
Much also depends on how honest the banks are about their exposure to bad debt. A fee-based insurance scheme whereby the Treasury and banks will identify bad loans  or toxic debts that will ultimately be covered by the taxpayer should remove some of the blockages in the system that are preventing the flow of mortgage lending. But without an honest and open declaration of exposure by all the banks, it will be very difficult to draw a line under what has gone before and start afresh.

The extension to the £250bn credit guarantee scheme announced in October until the end of this year should also have a positive impact, allowing banks and building societies to roll over new debt, as should the new liquidity scheme to replace the Special Liquidity Scheme allowing banks to swap illiquid assets for gilts.

The change in strategy with Northern Rock is interesting. Instead of encouraging the lender to run down its business and shrink its mortgage book, the government has changed tack. The bank will now encourage existing customers to stay, presumably with more attractive reversion deals. It will also look to attract new borrowers – hopefully those purchasing, not just remortgaging, with more attractive rates.

We wait to see whether this package will have the desired effect and get banks lending again. Mortgages are already becoming cheaper but tend to be most readily available to the lowest-risk borrowers with significant deposits or equity in their homes. An increase in liquidity should encourage more lenders into the market and more competitive rates.