HM TREASURY News
Release (PN/126/08) issued by COI News Distribution Service. 25
November 2008
The Government
announced a package of support for financial stability on 8
October, and set out how it would apply to individual banks on 13
October and 18 November. It made further announcements in the
Pre-Budget Report on arrangements to work with the banking sector.
This statement provides an update on ongoing elements of this work.
Lending Panel
The Government announced in its Pre-Budget
Report yesterday further measures to work with banks and building
societies to ensure that they continue to support the wider
economy during the downturn.
A Lending Panel has been established to monitor lending to both
businesses and households, and to promote best practice across the
industry in dealing with borrowers facing financial difficulties.
The Lending Panel will report to the Chancellor of the Exchequer
and the Secretary of State, BERR. It will meet monthly, and will
comprise the Government, lenders, consumer, debt advice and trade
bodies, and regulators and the Bank of England. Arrangements for
the first meeting will be announced shortly.
The Pre-Budget Report also announced the establishment of a
discussion forum, chaired by the Economic Secretary to the
Treasury, to look at how banks and other financial institutions
can work better in the interests of consumers and society as a
whole. Membership of the forum will be drawn from retail financial
institutions and consumer groups, and arrangements for the first
meeting, will be announced shortly. An update on the forum's
work will be provided at Budget 2009.
Bank Recapitalisation Programme
The Bank Recapitalisation
Programme helps enable banks to increase the level of tier one
capital they have available, above that required to meet
regulatory requirements, to maintain financial stability and
ensure they are strong enough to continue to lend to businesses
and consumers during the downturn. For RBS, and (subject to the
merger) HBOS and LloydsTSB, the Government has underwritten
significant capital raisings amounting to £37bn; other banks, such
as Barclays, Abbey and HSBC, have chosen to fund capital increases
from their own resources or from private investors.
Those banks whose capital raising has been underwritten by the
Government have committed to maintain the availability and active
marketing of competitively priced lending to homeowners and small
businesses at 2007 levels.
The FSA made a statement on 14 November clarifying its position
on the capital requirements for banks as part of the overall
support package. The statement made clear that the appropriate
level of capital for each institution is determined by the FSA in
relation to that institution's specific risks and
circumstances. However, in reaching that determination the FSA
used a common framework of capital ratios to risk weighted assets,
in particular a total tier 1 capital ratio of at least 8 per cent
and a core tier 1 capital as defined by the FSA of at least 4 per
cent after an individually stressed scenario. In this statement,
the FSA made clear that this approach was not intended to set new
minimum capital ratios, rather it was the framework adopted in the
context of implementing the overall support package. As the FSA
has already announced, it will address the longer-term capital
regime for deposit takers in a Discussion Paper in the first
quarter of 2009. It should, however, be recognised that the banks
were recapitalised to create a larger, usable buffer of capital to
absorb losses that might occur during the recession and so they
can continue to extend new lending.
It will take time for the effects of the recapitalisation of
banks to take effect. However, since 7 October the credit default
swap spreads have already fallen by approximately 30-50 per cent
for the banks whose capital-raising have been underwritten by the
Government. LIBOR rates have fallen by more than 200 basis points
since 8 October.
The Government has made clear that the Bank Recapitalisation
Programme remains open to eligible institutions and has set out
the general principles applying and conditions that must be satisfied.
Looking ahead, the Government, the FSA and the Bank of England
are examining ways of making the capital and liquidity regimes for
banks less pro-cyclical and are working through the FSF and other
fora towards international measures to dampen the cyclicality of
the system.
Credit Guarantee Scheme
Since 13 October, sufficiently
capitalised eligible institutions have also had access to
Government guaranteed funding under the Credit Guarantee Scheme,
an integral part of the Bank Recapitalisation Programme. The
Government expects that by the end of 2008 some £100bn of
guaranteed debt will have been issued by participating institutions.
The Scheme has helped to strengthen stability in the banking
sector and hence the wider economy. Along with the
recapitalisation arrangements, it has helped institutions to take
steps to issue debt. However, markets can move quickly and there
continue to be new developments. Sir James Crosby has completed
his report on supporting a resumption of the mortgage-backed
securitisation market through a guarantee scheme. Other countries
have announced and started to introduce schemes similar to the
Credit Guarantee Scheme. City participants have made a number of
suggestions about the Scheme. The Government will therefore
undertake a quick review over the coming weeks of the arrangements
for this scheme to assess whether it has any implications for the
Crosby proposals and how it is working in practice, to maximise
its impact on financial and wider economic stability while
ensuring that it does not crowd out market-based lending now or
when better market conditions return. In particular, the review
will consider whether the changes will increase the flow of
competitively priced funds to needy borrowers. The review will be
completed before Christmas.
In total, the Government expects participating institutions to
issue up to £250bn of guaranteed debt. The scheme is open for an
interim period of six months initially, for debt of up to 36
months' maturity. These limits will be kept under review.
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