The government is considering a series of options including state-backed schemes to help fund new mortgage lending, which would run alongside but be separate from the successor to the Bank of England's Special Liquidity Scheme (SLS). The Bank's new scheme, dubbed "son of SLS" in some quarters, will thus not be used to kick-start the housing market, as has been sometimes suggested.
The Treasury is thought to have accepted any successor to the SLS will be separate from other possible government-backed measures to revive the housing market. Any state-funded plan which may emerge from former HBOS chairman Sir James Crosby's review of the mortgage finance market will exist separately from the Bank's own machinery.
Sir James is expected to report to the Chancellor in the next few weeks. Last month, the Governor of the Bank of England, Mervyn King, made his scepticism apparent. "It would be a very dangerous move to a situation where the Government saw its major role as guaranteeing lending. Why should the taxpayer take on the risk of borrowing by individual borrowers?" Some in No 10 and many more in the housing industry are reportedly keen on just such a guarantee and a radical extension of the SLS. Mr King would appear to have won at least this skirmish.
However, the question of what, exactly, will replace the SLS is becoming acute. Launched in April as a "one-off operation with a finite life", the initial six month "window" will close in the week beginning 20 October. After that, only existing facilities can be rolled over, for a period of three years. In any case, the SLS was restricted to older mortgage-backed securities; anything originated after the end of 2007 cannot be used, a source of irritation for some of the Bank's political masters.
Bank share prices have come under pressure from uncertainty about the "withdrawal" of the scheme, and the supposed reliance of the banks on it. Halifax Bank of Scotland shares were down 5 per cent at one point yesterday. Morgan Stanley described these fears as "overdone".
Last week, hints from figures on the governing council of the European Central Bank about a tightening up of collateral for their liquidity support arrangements – including a withdrawal of eligibility for new mortgage-backed assets – also disquieted the markets, especially as some UK institutions are known to have used this "back door" for additional support. Collins Stewart said yesterday around £100bn of the UK banks' collective "funding gap" has been filled via the SLS. The building societies have also used the facility.
The SLS has been well used. Against an order of magnitude of £50bn indicated by the Bank at launch, analysts at UBS say some £200bn of mortgage-backed securities have been converted into gilts, a perhaps fanciful estimate. Other guesses, of £80bn to £100bn, backed by figures from the Bank for International Settlements Quarterly Report, seem nearer the mark.
However, the Bank itself has made clear that, when the SLS "window" is closed, some new machinery will be brought in. Whether that takes the form of a permanent "window" or a facility that can be used from time to time has not yet been made public. The Bank's review of its open market operations, the "Red Book", will be published within the next month, so its precise plans for a "son of SLS" will be made plain then, and before the existing window shuts.
In a speech in June Mr King said: "We intend to learn from the experience of the scheme to put in place a liquidity facility that works in all seasons – both 'normal' and 'stressed'. It will be part of a set of reforms to our Red Book... Any such facility will need to meet two challenges: it will need the right pricing structure and it will need to overcome the 'stigma' problem that has affected access to all central banks during the current crisis."
On 13 August, Mr King added: "The SLS was introduced as a measure to deal with a legacy problem of liquidity of the stock of assets which banks owned last year when the crisis hit. So that window will close in October. The longer-term issue of tightening of credit conditions is much wider. That is to do with the health of the capital position of the banking system, and it's very important not to confuse the two".Reuse content