Lenders to be monitored by the Government

A Lending Panel has been established

The Government announced in its Pre-Budget Report 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.