In a speech to the Policy Exchange today Osborne said he supported the action taken by the Bank of England to re-open the market in mortgage-backed securities but insisted more needed to be done with “immediate priority”.
He said: “A broader collateral swap programme supported by the Treasury could help. This would allow banks to swap their illiquid mortgage backed securities for liquid government bonds.”
He accepted such a move would require “cast iron guarantees” for the taxpayer and insisted these be priced into the deal “not least to minimise moral hazard”. He also said any intervention must not exacerbate inflationary pressures in the longer term.
But he was confident such a programme could be successful and urged Gordon Brown to push the idea at tomorrow’s banking summit.
Osborne also suggested reforming capital adequacy requirements so the capital banks were required to keep could alter during the cycle, to control credit in times of boom and expand it in times of contraction.
He said: “Under such a system a bank’s capital adequacy ratio would comprise of an element set by the prudential supervisor, specific to that bank as now, combined with an element set by the monetary authorities across the whole financial system.”
He attacked the Government for having “no answer to the challenge of controlling the credit cycle” and cited a Financial Times poll which revealed Brown as the least trusted of any Western leader to steer the UK through economic turbulence.