Measure for measure

Will last month\'s package of measures deliver what the government and lenders want? Although it took a long time to arrive, it did add up to concerted action on a scale reflecting the problems affecting lenders.

It’s too early to predict success. Drafting this column in the immediate aftermath of the announcements, our initial reaction is that the measures tick some boxes but not all.

In summary, the announcements appear to address many of the industry’s concerns on capital and liquidity issues but not those on credit risk.

We are currently consulting our members to see how they think they will be affected. As ever the devil will be in the detail, some of which is still not yet clear. There is a lot for us – and for individual firms – to work through.

Our starting point has been to assess the package of measures against policy priorities we had already identified, some of which I set out at our annual conference in December.

We heard of plans for a guarantee scheme for securities backed by mortgages, for which we have been arguing since autumn 2007, as a means of helping restore wholesale funding. But this will not begin until April, and there will be a fee.

We have been asked by the Treasury to work on the details of the scheme and will try to ensure it delivers maximum benefit and that all lenders have access to it.

Meanwhile, the Northern Rock announcement indicates that there has been a rethink about how nationalised banks should operate in the market. This will go some way towards easing the squeeze on mortgage lending capacity which has contributed to the sharp weakening of the housing market but leaves un- resolved what the strategy of Bradford & Bingley might be.

The credit insurance measures will help protect against poorly performing assets. In effect, this provides the benefit of a ‘bad’ bank for toxic assets without the complexity and cost of removing them from bank balance sheets and setting up a new entity. However, like the guarantee for mortgage-backed securities it is too narrowly available and we will press for access to be broadened.

Recent announcements also confirmed that, with effect from the end of the January, the Bank of England’s Special Liquidity Scheme would be closed as planned but there were improvements to the discount window facility, established in October as part of the Bank’s new permanent market operations to provide liquidity to banks on demand.

Finally there was support from the Financial Services Authority for reinforcing counter-cyclical measures in the regulatory capital regime, with encouragement for firms to build up capital reserves in good years and draw down on them during downturns. It is not yet clear how this policy will work as we enter a period in which higher losses are expected.

So where are the gaps in the policy initiatives announced, and what else should be done?

For a start, we need a more inclusive app-roach that provides help for smaller deposit-taking institutions and specialist lenders, too. Only AAA-rated asset-backed securities will be eligible for the new credit guarantee scheme, which excludes specialist lenders.

Meanwhile, smaller deposit-takers have not only been excluded from the new asset protection scheme but will continue to bear a disproportionate burden of the cost of earlier bank bailouts through the Financial Services Compensation Scheme.

Perhaps this was predictable. In juggling its priorities and options the government is playing to different constituencies. It continues to focus on large banks, some of which are wholly or partly nationalised. It probably feels there is little public sympathy for guaranteeing riskier assets and that smaller organisations can have less direct effect when it comes to reversing the downward trend in mortgage market activity. It also wants to be seen as being tough on banks, even while trying to ease their plight.

But what is crucial for consumers, lenders and the economy is that conflicting goals and aspirations do not undermine the effectiveness of what the government is trying to achieve now that it has finally put together a concerted package of measures to address the problems.

There are still gaps to be targeted to help address worsening credit risk. To encourage borrowers and help underpin the housing market we need to consider how first-time buyers could be encouraged with slightly higher LTV lending, perhaps through wider availability of some form of mortgage indemnity guarantee from the state.

And to support house builders and improve the availability of affordable housing, the problems of housing associations in raising finance need to be addressed.

Finally, arrears and possessions will rise this year despite the government’s announcements so we need more help for borrowers in difficulty, including wider access to income support for mortgage interest, and fairer – and more widely available – options for sale-and-rent-back before customers have to face the trauma of repossession.