Banks should boost savings to pay back government loans, says BSA

21 June 2010 | By Samuel Dale

There should be no delay in lenders repaying government loans, with intensive retail saving schemes covering some of the cost of this, according to the Building Societies Association.

The Special Liquidity Scheme was set up to provide emergency funding for lenders at the height of the financial crisis and next year £300bn will begin to be repaid to the Bank of England over three years.

There have been warnings that if banks have to pay back the money in the next few years it could lead to subdued mortgage lending for as long as five years.

Ray Boulger, senior technical manager at John Charcol, says: “It’s hard to see how some banks are going to pay it back without cutting their lending.”

He adds that it may make sense for the Bank to renegotiate the conditions of the schemes and extend the term of the loan, but offer incentives if lenders agree to pay back the money within an agreed timescale.

But Paul Broadhead, head of mortgage policy at the BSA, says delay is not the answer because lenders have the money.

He says: “If you speak to lenders they are fine about making these repayments and they’ve got a plan for them. “But no-one knows what that might mean for the industry so it’s about ensuring there is not a disproportionate impact.”

Broadhead adds that capital could be raised via asset sales, wholesale funding or intensive savings schemes.

He says: “Lenders could try to bring in extra retail deposits by offering best buy savings deals.”

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat