Ministers mull new mortgage lending scheme

Banks under pressure as BoE's special lending scheme set to expire next month

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".

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most