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Government slashes credit guarantee scheme fees

The Treasury has revealed it is to improve the credit guarantee scheme that allows banks and building societies provisions to support capital.

Originally, lenders have to pay a bank debt guarantee fee of 0.5 per cent plus a median five-year credit default swaps spread from October 2007 to October 2008, which meant banks were paying as much as 1.7 per cent, according to New Star.

But now, the scheme has been adjusted “taking into account international experience”, meaning banks will now pay less for guarantees, which the Government hopes will improve the current moribund credit markets.

The swaps will now be set between July 2007 and July 2008, which the Treasury says were a “much more normal rate”. The Treasury says this means banks will be paying nearer 0.75 per cent. It admitted that previous CDS spreads captured a high stress period.

This mirrors the US Federal Reserves’ fee, which is a flat 0.75 per cent after 30 days.

Although the Treasury has made changes to the guarantee fees, for bank capitalisation, it still currently demands a 12 per cent yield, which is irredeemable for five years, and has no ordinary share dividends until repaid.

The Treasury says this change will be taken into account while it assess the proposed scheme by Sir James Crosby, where the Government would guarantee new RMBS.


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