Living on borrowed time

16 March 2010

The Council of Mortgage Lenders’ has rightly raised the problem in its budget submission to the chancellor, the £300bn question being: “How will the government work with the industry to address the market implications of lenders repaying what they borrowed under the Special Liquidity Scheme and the Credit Guarantee Scheme”?
 
This, the CML says, is a matter of urgency in view of the scale of the problem and its potential knock-on implications on future funding to support economic recovery.
 
“At the moment”, says Michael Coogan, director general of the CML, “we cannot see how to square the circle between increasing demand for housing, constraints on the necessary finance to deliver it, the repayment of £300bn of lending support between 2011 and 2014, and reductions in public spending as the fiscal deficit is addressed. And all of these features apply at a time when more people are going to need housing help.”

Coogan’s concern is that there is too little clarity on how the competing policy pressures can be reconciled. As things stand, the Financial Services Authority acknowledges the problem in its financial risk outlook paper for 2010 which it published last week, but typically it is long on analysis and short on solutions.
 
Moreover, it sees the situation from a different perspective, stating: “Banks and building societies therefore face major challenges in developing alternative sustainable sources of funding needed to close to some degree the ‘customer funding gap’ which opened up in the years before the crisis”.
 
The good news is that a return to good old fashioned banking with lending being funded entirely from retail deposits isn’t on the FSA’s agenda. It acknowledges that: “Closing the entire customer funding gap by the end of 2012, for instance, would require a growth rate of 12% per annum in household deposits which would imply a savings rate far in excess of conceivable levels.”
 
What are the alternatives then? Well, according to the FSA it’s essential that firms develop plans for other sources of more sustainable and longer-term finance, for instance through issuing significant quantities of medium- and long-term debt.
 
“ New debt issuance (unguaranteed and unretained) between 2010 and 2012”, it states, “would need to be at a similar level to that achieved in the period between 2004 and 2006 in order to replace the £440bn of maturing debt issues plus SLS liquidity support which come due between now and end 2012.  If public issue securitisation can be restarted, this could contribute to closing the gap.”
 
As lenders have been arguing all along for some sort of state help to revitalise the securitisation market they might be excused for having a sense of de ja vu about all this. In other words the original problem hasn’t gone way and state intervention has just been a very expensive way of buying time.