The Government has made fresh moves to stimulate the lending market, by reforming its Credit Guarantee Scheme for banks' borrowing. It hopes the changes will increase the availability of home loans.
Lower costs
The Credit Guarantee Scheme was launched in October as part of a package of measures to reduce the scale of the crisis in the financial markets. While the Government believes it has been essential in preventing the banking system from completely melting down, it has had a limited effect on the availability of mortgages. It has, though, been widely copied around the world.
Banks and building societies will now be charged lower interest rates for entering into credit guarantees with the Government. Charges will remain "commercial", with the Government expecting to achieve a financial return, alongside adding liquidity to the financial markets. The fall reflects lower market costs for insuring loans to banks.
The Government's Lending Panel - established in the Pre Budget Report - will monitor whether banks and building societies are enabling personal and business customers to benefit from the easier credit conditions, both in the availability of loans and in the terms on which they are provided.
Longer period
Credit guarantees will also be made available to banks and building societies over a longer period. The initial intention was to restrict the guarantees to three years, but they will now be made available for up to five years - expiring in April 2014. This should enable institutions to improve their management of the transition from state guarantees to other arrangements.
Guarantees will also be made available for borrowing in a wider range of currencies: at present they are restricted to sterling, euro and US dollars. The extension should assist UK institutions attract a more diverse range of investors. The changes are subject to approval from the European Commission under State Aid rules.
By the end of this year, the Government expects to have made available £100bn under the guarantees. The Government says that the measures have already been effective not only in improving the availability of loans, but also in reducing the cost of insuring banks' credit.
The Government said it was also continuing to review the conditions of the lending markets and was working with the European Commission to try to implement proposals from Sir James Crosby's review of the mortgage market, which was published alongside the Pre Budget Report.
A welcome
The Council of Mortgage Lenders welcomed the reforms. Michael Coogan, the CML's Director General, says: "The Government now seems to be hearing the message that lenders cannot realistically deliver all that is expected of them under current conflicting expectations, and moving to address some of these. We welcome the Chancellor's acknowledgement that there is still more that the Government can do to help try to facilitate more conducive conditions for lending."