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Mounting concern about ongoing level of BoE support to UK banks hits bank shares
There is mounting concern in the UK banking sector about what will happen to the funding support provided by the Bank of England as the end of the current scheme in six weeks tightens the screws on lenders.
Analysts say Britain's banks may have borrowed £200 billion from the BoE under an innovative Special Liquidity Scheme (SLS) launched in April, but the central bank plans to close the window on Oct. 20.
It is looking to replace it with a more permanent arrangement, but has not said how it will work.
That has stoked concern bank funding will stay tight and become more expensive as securitisation markets remain closed, and has contributed to a fall in UK bank shares this week.
Shares in HBOS, Britain's biggest home lender and with the largest funding gap between loans and deposits, have dropped 12 percent to 279 pence this week. Lloyds TSB, Barclays and others have also sagged.
The European Central Bank, which also provides funds for UK banks, unveiled plans on Thursday to tighten rules on the assets it takes as collateral to borrow funds, further unsettling investors.
'Although the SLS has a finite life, we expect the Bank will announce a new facility using similar principles,' said Paul Measday, analyst at JP Morgan Cazenove.
'We believe it makes sense to maintain a scheme that has successfully provided liquidity to the banking system whilst funding conditions remain difficult and the future is so uncertain,' he said in a note.
Several other analysts agreed, but said there were jitters about the mechanics.
'There is uncertainty (about) what it will be replaced with... there seems to be a battle going on, with politicians happy to provide support to the mortgage lenders but the Bank more reluctant,' one analyst said.
'The Bank clearly doesn't want anyone to fail but on the other hand they (banks) have to manage their liquidity risk.'
Politicians are concerned that lenders will pull back even harder on lending if funding becomes more difficult, heaping more pressure on the brittle housing market.
BoE Governor Mervyn King said in June the SLS would be replaced by a liquidity facility that works under both 'normal and stressed' market conditions. It will be part of its red book review of open market operations, expected to be unveiled before the SLS window closes.
The new plan is expected to run separately to any government measures introduced as part of James Crosby's review of the mortgage finance market. That review is expected this month.
The Council of Mortgage Lenders this week urged the government to make an early announcement 'of the renewal/extension' of the SLS or any other measures being planned to 'help to resolve market uncertainty'.
The CML said mortgage funding problems remain a bar to meaningful housing market recovery.
Critics of the scheme say it has allowed banks to bundle up toxic mortgage paper, securitise it and sell the package to itself so it can pledge it to the BoE.
Analysts say Britain's banks may have borrowed £200 billion from the BoE under an innovative Special Liquidity Scheme (SLS) launched in April, but the central bank plans to close the window on Oct. 20.
It is looking to replace it with a more permanent arrangement, but has not said how it will work.
That has stoked concern bank funding will stay tight and become more expensive as securitisation markets remain closed, and has contributed to a fall in UK bank shares this week.
Shares in HBOS, Britain's biggest home lender and with the largest funding gap between loans and deposits, have dropped 12 percent to 279 pence this week. Lloyds TSB, Barclays and others have also sagged.
The European Central Bank, which also provides funds for UK banks, unveiled plans on Thursday to tighten rules on the assets it takes as collateral to borrow funds, further unsettling investors.
'Although the SLS has a finite life, we expect the Bank will announce a new facility using similar principles,' said Paul Measday, analyst at JP Morgan Cazenove.
'We believe it makes sense to maintain a scheme that has successfully provided liquidity to the banking system whilst funding conditions remain difficult and the future is so uncertain,' he said in a note.
Several other analysts agreed, but said there were jitters about the mechanics.
'There is uncertainty (about) what it will be replaced with... there seems to be a battle going on, with politicians happy to provide support to the mortgage lenders but the Bank more reluctant,' one analyst said.
'The Bank clearly doesn't want anyone to fail but on the other hand they (banks) have to manage their liquidity risk.'
Politicians are concerned that lenders will pull back even harder on lending if funding becomes more difficult, heaping more pressure on the brittle housing market.
BoE Governor Mervyn King said in June the SLS would be replaced by a liquidity facility that works under both 'normal and stressed' market conditions. It will be part of its red book review of open market operations, expected to be unveiled before the SLS window closes.
The new plan is expected to run separately to any government measures introduced as part of James Crosby's review of the mortgage finance market. That review is expected this month.
The Council of Mortgage Lenders this week urged the government to make an early announcement 'of the renewal/extension' of the SLS or any other measures being planned to 'help to resolve market uncertainty'.
The CML said mortgage funding problems remain a bar to meaningful housing market recovery.
Critics of the scheme say it has allowed banks to bundle up toxic mortgage paper, securitise it and sell the package to itself so it can pledge it to the BoE.
Fri, 5th Sep 2008