UK government creates £50 billion ABS fund
The UK government outlined further plans today to try to stabilise the economy and encourage banks to lend more.
Brown said: "These are comprehensive measures focused on one purpose - increasing the amount of lending that is available to families and to the businesses that are the backbone of our country and who want to invest and create jobs."
The news included the creation of a £50 billion asset purchase facility, which will start operations on February 2. This involves the Treasury authorising the Bank of England to purchase high-quality private sector assets, including paper issued under the UK government's capital guarantee scheme (designed to reduce the risks on lending between banks), corporate bonds, commercial paper, syndicated loans and a limited range of asset-backed securities created in viable securitisation structures.
This fund will be financed by issuing Treasury bills, and the Treasury will indemnify the Bank of England. Further details of this will be announced by the end of January.
The government also revealed an asset protection scheme, designed to protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets. The Treasury, in return for a fee, will protect against the major portion of credit losses that exceed the "first loss" amounts, which banks will bear. The eligible assets for this scheme include portfolios of residential and commercial property loans, structured credit assets, corporate and leveraged loans, and any closely related hedges held by the participating institution as at December 31, 2008. This scheme is expected to last less than five years.
The government will extend the drawdown window of its capital guarantee scheme, which was announced last October, from April 9, 2009 to December 31, 2009, subject to state aid approval. All other aspects of the scheme will remain the same, including the final maturity date of April 9, 2014. During the drawdown window, banks can issue more debt, and once it has been issued, they can keep rolling it over once the window closes (all of it until April 13, 2012 and up to one-third of the total until April 9, 2014).
Brown said the government will negotiate lending responsibility agreements with participating banks in order to maintain and improve the supply of credit to the wider economy. These agreements will have specific and quantified lending commitments, which will be binding and externally audited.
The government is also considering further ways of addressing the loss of mortgage lending capacity. As a first step, it confirmed that Northern Rock, the mortgage lender nationalised in February 2008 after struggling to raise money market and capital market funding, is no longer actively pursuing a policy of rapidly reducing its existing mortgage book. The original objective of the bank's scheme was to encourage customers to remortgage to other lenders in order for the institution to pay back its government loan.
"This has been very effective and has enabled the company to reduce the government loan well ahead of the business plan," said Northern Rock in a statement today.
Reflecting this, and in order to support government policy to increase mortgage lending capacity in the market, the bank said it is slowing down the rate of mortgage redemptions. This means more mortgage customers will be able to stay with Northern Rock, but also means the repayment of the loan will be slower.
See also: Bank of England predicts long haul for economy
Tucker appointed deputy governor of Bank of England
UK regulators propose remedies for future mortgage bank recoveries
Northern Rock fallout continues
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Structured products
A guide to home equity investments: the untapped real estate asset class
This report covers the investment opportunity in untapped home equity and the growth of HEIs, and outlines why the current macroeconomic environment presents a unique inflection point for credit-oriented investors to invest in HEIs
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…