BL: Buiter Says U.K. Banks Need $200 Billion Aid From BOE (Update1)
By Jennifer Ryan
April 19 (Bloomberg) -- Former Bank of England policy maker Willem Buiter said the central bank will need to offer loan swaps to financial institutions of at least 100 billion pounds ($200 billion) to kick-start the U.K. mortgage market.
The central bank, the Treasury and Prime Minister Gordon Brown's office may unveil a plan to swap mortgage-backed securities for government bonds as soon as next week, which the British Broadcasting Corp. reported yesterday will total 50 billion pounds. Banks including HBOS Plc have curbed lending and raised the cost of mortgage loans even after policy makers cut the benchmark lending rate three times since December to help avert a U.K. recession.
``In total, they would have to do -- not in one big go -- at least 100 billion for it to really actually make a difference to the liquidity position of banks, but also act as the catalyst for getting that market going again,'' Buiter said in an interview. He served on the bank's rate-setting panel from 1997 until 2000.
The plan's success ``all depends on the scale,'' Buiter, a London School of Economics professor, said yesterday. ``If they do 5 billion it's not going to do much. If they do 55 billion it would help deal with the overhang of illiquid mortgage-backed securities that mortgage lenders have on their balance sheet and prevent them from engaging in any new lending.''
Cash Injection
The U.S. Federal Reserve last month made up to $200 billion available to banks in return for debt including mortgage-backed securities and in December created a lending vehicle to make credit available to banks as an alternative to borrowing at its discount rate, which may carry a stigma.
To date, the Bank of England widened its collateral requirements just for three-month lending. It only accepts top- rated government securities at its weekly auctions.
The BBC said the mortgage rescue plan involves government bonds with a maturity of up to one year. They would be rolled over for up to three years, it said.
The plan would be the biggest special initiative by British monetary authorities to supply liquidity to the U.K. banking system and would meet banks' demands for ``longer term loans'' while escaping being accounted for in the national debt, the BBC said.
Market Strains
Chancellor of the Exchequer Alistair Darling ``has made very clear that work is under way at the highest levels to ensure that the secondary market returns to functioning normally,'' an official at the U.K. Treasury told Bloomberg News late yesterday. ``An announcement will be made in due course.'' The Bank of England declined to comment on the BBC report.
Central bank Chief Economist Charles Bean said April 17 that officials are working to try to relieve market strains, though he didn't give any details of the package being discussed. Speculation a plan may be agreed helped send the pound to a 10-day high of 78.76 pence per euro yesterday.
Buiter's estimate of the size of aid contrasts with that of Simon Ward, an economist at New Star Asset Management Group Ltd., who says the central bank needs to swap up to 40 billion pounds in mortgage-backed securities for government bonds.
The Council of Mortgage Lenders said April 18 that the value of new home loans fell 17 percent from a year earlier to 26.3 billion pounds last month. Total net mortgage lending in the year through February was 102 billion pounds, and outstanding mortgage debt that month was 1.2 trillion pounds, central bank data show.
Asset Swap
``The mortgage market has to shrink,'' Buiter said. ``We've had an unsustainable housing boom. If we get 50 billion pounds of net mortgage lending this year, that would be ample to sustain mortgage financing at a reasonable level.''
The central bank lowered the key interest rate by a quarter point to 5 percent on April 10. The gap between borrowing pounds for three months and the benchmark rate still reached a 3-month high of 93 basis points on April 14. On April 17, financial institutions bid for 50 billion pounds in the bank's weekly auction, the most since January and triple the amount on offer.
An asset swap, ``will help,'' Buiter said. ``It's fear and loathing that's closing the market.''
The seizure of credit markets worldwide has already claimed a U.K. casualty. Northern Rock Plc struggled to fund its business and then faced a run on deposits in September. After five months of trying to find a buyer, the government nationalized the Newcastle-based mortgage lender in February.
`Banana Republic'
Richard Lambert, another former central bank policy maker, said in September that the Northern Rock situation made Britain look like a ``banana republic.'' On April 18 he called for the Bank of England to be ready to take action, also in conjunction with other central banks.
``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. ``They should be working to on ways to help unblock the logjam in wholesale financial markets.''
Buiter said that pledges on future aid will be important if a plan does get announced.
``If they do this kicking and screaming and the indication is we shouldn't count on it any more, it won't help as much as if the bank said it will do whatever it takes to get the markets moving again,'' he said. ``It's the old credibility issue.''
To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net
Last Updated: April 19, 2008 08:37 EDT
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