Bank of England refuses permanent support to mortgage lenders

Bank of England Cannot Save Mortgage Market, Its Governor Says

By Edmund Conway
The Telegraph, London
Thursday, September 11, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/12/cnking...

Britain's stricken mortgage lenders cannot rely on the Bank of England to support them through the credit crisis, Mervyn King has warned.

The Governor provided the market with the first details of the structure of its much-anticipated new funding system but warned that the Bank was powerless to rescue the mortgage market.

The warning will disappoint bankers who were hoping the central bank would intervene with funding to kick-start the mortgage-backed security markets, which have been effectively closed for 13 months.

Mr King said that although the "Son of SLS" scheme would allow banks to swap newly-issued mortgages against liquid instruments, going one step further than its predecessor, there would be a far stricter time limit on these swaps, preventing institutions from depending on the Bank for permanent support.

The new arrangement will kick into action when the special liquidity scheme (SLS), which is thought to have been used by banks for as much as L200 billion worth of funding, closes on October 21.

Mr King also cautioned the Government against guaranteeing mortgages, warning that this would put taxpayers' money directly at risk.

His message will come as a disappointment for mortgage lenders, who have been under unprecedented strain since the mortgage securitisation markets they relied upon for much of their funding froze last August. They had been hoping for an extension of the SLS.

Instead, Mr King said the SLS had been a "one-off, exceptionally generous long-term facility" that will soon close.

"The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks," Mr King said. "But it is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system -- indeed, it cannot do that. Only private savers or taxpayers via the Government can provide such funds.

"So I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending."

He said central banks should not be regarded as a "magical piggy bank" for mortgage lenders, and that guaranteeing the mortgage market would have profound economic and fiscal consequences for decades.

Mr King will publish a consultation document on the new liquidity scheme next week. It will replace the so-called Red Book -- the system the Bank previously followed in providing cash to City institutions. City analysts said the framework hinted at by Mr King as he testified before the Treasury Select Committee yesterday appeared to bear some resemblance to the European Central Bank's liquidity scheme.

Mr King also warned that the Treasury risked sending inflation expectations higher unless it brings its own finances under control. It came as the Bank's own survey showed inflation expectations for the general public rose to 4.4 percent for the year ahead -- the highest since the survey began in late 1999.

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