Banks rescue package: will they start lending again?

January 19, 2009

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.

4 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

I think your comments do not go far enough. We have been in a bear market for 10 years now, with an increasing dependency on credit to make purchases that most of the country can not afford. For several years the media was reporting that nurses etc were unable to purchase a new home in various areas of the country. Our personal borrowings are into the Trillion pound status. UK PLS’s manuafacturing is being reduced by legislation, taxation and red tape along with the increase in national minimum wage has made us far less competitive. Our natual resources have not been properly invested in over the past 20 years which means we will be at the mercey of foreign companies to supply us into the later part of the century. Only now has the government started to stop the Social security culture we have allowed for decades be challenged. Our borders are under threat and black market working is taking away UK citizens jobs.

Will all of the above stop people from saving now and start to spend again? Who knows? With all the problems in the financial services industry (Maddoff etc), people have now lost trust. Banks and commercial businesses have been targetd with short term goals making them take more risks. Will this change? NO!

So all the liquidisation of the banks will mean nothing until at least the end of 2009. But given what you have read, did not we not need this shock before now. Lets get back to basics and educate our children, invest in manufacturing to make us more competitive again and get sensible legislation in place to reduce illegal immigration and makie peole who are able to work earn money na dpay taxes.

Umm – its complicated. I believe in the 1930s a large number of banks went to the wall in the US. Now we might wonder why not just let these UK banks go down instead of bailing them out with billions? What would happen? We talk about their toxic assets – bad loans, sub-prime mortgages bought up from America – how big the losses – how can we say – that depends on house prices in America and their economy – so how can anyone value the “possible losses” on those assets. I see why everyone is desperate to shore up the whole house of cards. We know who we blame but blaming won’t get us anywhere its too late for that now the damage is done. Unfortunately as I understand it the banking sector is now a major part of our economy and too important to allow to fail – that is another of our mistakes. I wonder whether we should start up a new bank – with tax payer’s billions and start lending again via that to help the wider economy but sensibly – or am I missing the point is that the idea of Northern Rock now. Will all of us accept much less individually for the good of the whole, to avoid job losses etc. I think we all as a country have to ask ourselves some difficult questions. Do we want to go back to how we were greedy, selfish etc or will we change for the good of the whole? Yes I know many of us feel we are paying for the bank’s mistakes – I would expect them to cut their salaries at least by two thirds if not more it would only be fair. After all they have enriched themselves by flogging loans and mortgages to people who probably could never afford it. Many people have been ripped off by their own countrymen and that is the shame and tragedy of it.

Posted by Miss not Liz Jones | Report as abusive

The (glaringly obvious) clue to the answer to the headline question is in the second paragraph.

The banks will lend money to people who can demonstrate that they are able to pay it back, just as they have always done.

The current breakdown in the banking system was caused by lending money to people who could NOT pay it back – a policy actively encouraged by the Clinton and Blair administrations as an experiment in “inclusive lending”.

The banks will not be so stupid as to do the same thing again, unless the government simply tells them privately that they should do so and that any defaults will be covered by the taxpayers.

Could the Brown government be so irresponsible as to compound the damage that has already been done? If the policy buys votes – Yes.

Posted by Peter | Report as abusive

It is unfortunate ,in this case too that the U.K.followed once again the U.S.A. step by step
in the sub prime mess.

The mere fact you could borrow more than 90pct.
of the price of a property to be resold within short
time to make quick profit, thus building up the bubble
and then on bubble busting if still holding the property
the bank,bldg.society having to reposition, creating huge
losses finally to be afforded by the taxpayer.

This could not be allowed by the laws in the Continent ,
in Germany for instance .

Posted by yannis | Report as abusive