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mortgage lenders thrown lifeline

Emergency action to strengthen the capital position of banks and building societies should help free up the mortgage market and improve the prospects of borrowers, according to the Council of Mortgage Lenders.

At least £200bn will be made available by the Bank of England to banks under a Special Liquidity Scheme. In addition, the Government is investing directly into three banks by buying shares.

Beneficiaries

Initially the Government is putting £37bn of capital in Royal Bank of Scotland (which also owns NatWest), Halifax Bank of Scotland and Lloyds TSB. It is ready to put another £13bn of capital into other banks if needed.

Other banks currently eligible for support are Barclays, Abbey (now owned by Banco Santander), HSBC and Standard Chartered, plus the Nationwide Building Society. But all - with the possible exception of Barclays - seem unlikely to seek the extra capital.

The scheme may subsequently be extended to more banks and building societies. A separate announcement by the Treasury has protected savings in collapsed Icelandic banks - including Landsbanki's subsidiary Icesave, in which about 300,000 Britons hold deposits.

Further guarantees

The Bank of England will continue existing support for the major banks, in which it has injected liquidity. But on their own these moves failed to stop the run on banks' shares, nor did they kick-start the inter-bank lending market.

The Government has indicated it is imposing conditions on the banks in return for the purchase of shares and other financial support. Terms are likely to include commitments to continue mortgage lending, steps to avoid mortgage foreclosures, support for small businesses and limits on executives' pay and other remuneration.

Plan welcome

The Council of Mortgage Lenders welcomed the measures, saying they should help banks to raise finance and strengthen their capital positions over the longer-term. This, in turn, should improve confidence and stability in the banking market and consumer confidence in the housing market. But, the CML warned, the apparent ineligibility of specialist lenders for support could mean that some sectors of the housing market continue to suffer.

CML Director General Michael Coogan said: "From what we can see so far, this seems to be a decisive, coordinated and reasonable package of measures that address both the relevant factors necessary to support a return to market stability. The flow of funding to support mortgage lending has been severely constrained, and these measures will help to create more positive conditions for the mortgage market."

  • by Paul Gosling
    13 October 2008