Bank of England Must `Be Ready
The Bank of England should be ready to act to ease financial-system strains both within the U.K. mortgage market and in a global move with other central banks, former policy maker Richard Lambert said.
“They need to be ready to join in concerted international action to ease strains on bank liquidity,'' Lambert, director- general of the Confederation of British Industry, said in a speech in Edinburgh today. “They should be working to on ways to help unblock the logjam in wholesale financial markets.''
The U.K. central bank is working with the Treasury and Prime Minister Gordon Brown's office on a plan to inject liquidity into markets after a worldwide surge in borrowing costs. Lloyds TSB Group Plc, Nationwide Building Society and HBOS Plc have raised the cost of mortgage loans even as the central bank lowered its benchmark lending rate, threatening to curb U.K. economic growth.
“Radical action seems to be what is needed,'' Trevor Williams, chief U.K. economist at Lloyds TSB, said in a Bloomberg Television interview in London today. “It will help to ease the strains in the mortgage markets and allow the banks to continue to offer good deals to borrowers.''
The pound rose to a 10-day high against the euro, heading for a weekly gain, after the Wall Street Journal said the Bank of England will take as much as 30 billion pounds of infected mortgages off lenders' balance sheets to ease the credit crisis. The currency traded at 79.05 pence as of 2:42 p.m. in London.
BOE Options
Lambert, a former member of the central bank's rate-setting panel, said there was “not a lot'' policy makers could do to prevent a slowdown. “That is not to say the financial authorities should just sit back and do nothing,'' he said.
He also welcomed speculation of a move by banks including Royal Bank of Scotland Group Plc to shore up capital through a share sale. RBS is considering such measures, according to a person with knowledge of the plan.
“It is right that these major banks should be taking a lead in raising new equity and rebuilding confidence,'' Lambert said.
Economist Simon Ward at New Star Asset Management says the central bank must be prepared to swap up to 40 billion pounds ($80 billion) in mortgage-backed securities for government bonds to revive lending in the U.K.
The Council of Mortgage Lenders said today that the value of new home loans fell 17 percent from a year earlier to 26.3 billion pounds last month. About 1.2 trillion pounds of mortgage loans remain outstanding in Britain, according to Bank of England figures.
`Worsening' Situation
“The picture for mortgage approvals for new business and prospective lending levels in the next few months is worsening,'' said Michael Coogan, director general of the CML, in a statement today. “We await the eagerly anticipated announcement of action by the Bank of England to respond to these rapidly worsening market conditions.''
Brown met with bank executives in New York and London this week and Fed Chairman Ben S. Bernanke this morning in Washington payday advance low fees low rates payday advance. Officials from the CML will visit Chancellor of the Exchequer Alistair Darling on April 22 to talk about how banks can help borrowers who fall into arrears.
Bank of England Chief Economist Charles Bean said yesterday that officials are working to try to relieve the strains, though he didn't give any details of the package being put together. An announcement is due as early as next week.
“The bank is continuing to work with the relevant parties to develop approaches that will help to ease the strains and act as a bridge to a more normal outcome,'' Bean said in a speech in London last night.
Mortgage Plan
A Treasury spokesman said government officials are working closely with the Bank of England on the plan, though the timing of the announcement isn't certain. Darling must focus on piloting the Finance Bill through Parliament when lawmakers return from recess on Monday. The Bank of England declined to comment on the details of the plan today.
Brown's popularity has tumbled in recent weeks as surveys showed house prices began to fall, ending a decade-long surge that tripled the cost of owning a home in Britain. The Conservative opposition had the support of 44 percent of voters, the most in 16 years, compared with 28 percent for Labour, according to a YouGov Plc poll finished on April 11.
Brown's Response
“What we are discussing with the banks and the building societies through the Bank of England and through the Treasury is what measures we can take to both inject liquidity into the market place on a more sustained basis,'' Brown said in New York on April 16. “We are also looking at how money can get through to first time buyers particularly those groups of people who have been denied the chance to get mortgages at the moment.''
Yesterday, the Bank of England said financial institutions bid for 50 billion pounds in its weekly auction, three times the amount offered and the most since January, as banks sought more cash to improve liquidity. The Bank of England offered 13.7 billion pounds in the sale of securities.
The gap between borrowing pounds for three months and the Bank of England's benchmark rate, currently at 5 percent, rose to 93 basis points on April 14. That was the biggest spread since December. The three-month rate fell to 5.89 percent today.
Brown's focus is on channeling cash to building societies and specialist mortgage lenders whose credit dried up after the subprime collapse in the U.S. last year. Northern Rock Plc, the first casualty of the credit crunch, relied on about 25 billion pounds of government loans and guarantees until it was nationalized in February.
“The short term need is liquidity,'' Mark Spelman, a senior partner at consulting firm Accenture Ltd., said in a Bloomberg Television interview. “The coordinated action they're going to get with the Fed and the Bank of England is aimed at getting more liquidity into the system.''
Filed under: technology by John