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Triangular bandage

The mortgage industry has welcome the Government’s bank rescue package after spending the last few months pleading for radical action.

The Government was forced to rush out an announcement last week after a BBC leak and a flood of positive responses followed from the Council of Mortgage Lenders, Building Societies Association and Association of Mortgage Intermediaries.

But there are some reservations over whether the package is enough to cure the banking system’s woes.

Many saw the nature of the Government’s three-pronged intervention to tackle capital, liquidity and the paralysed wholesale markets as more comprehensive and better targeted than the US bailout.

To bolster capital, the Government secured a £25bn recapitalisation agreement with seven banks and one building society – Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, Royal Bank of Scotland and Standard Chartered. This could be achieved by normal fund-raising methods or the banks could make use of a £25bn Government fund in exchange for giving the Treasury preference shares.

The Government said it stood ready to provide another £25bn for eligible institutions as necessary.

This week, the Government revealed it would be making capital investments totalling £37bn in Royal Bank of Scotland, Lloyds TSB and HBOS in return for shares. HSBC, Abbey and Barclays are aiming to recapitalise independently.

To tackle liquidity, the Government revealed that at least £200bn would be made available through the special liquidity scheme and it would bring forward a permanent regime to underpin liquidity.

To unfreeze the wholesale markets, the Government offered to guarantee inter-bank lending at commercial rates for banks that increase capital by a specified amount, with take-up expected to be a further £250bn.

The Bank of England’s 0.5 per cent cut in te base rate last week also boosted morale, particularly as it was part of a co-ordinated action by central banks in Europe and the US.

But there is considerable disappointment that the three-month Libor rate remains high after the rescue package was unveiled, as the £250bn promise of guarantees on interbank loans were designed to unfreeze wholesale markets.

The three-month sterling Libor rate was higher on Friday at 6.28 per cent than before the base rate cut.

The response to the rescue package in Parliament was supportive, with the Conservatives and LibDems backing the action.

Some questions were raised by both opposition parties over the extent to which the Government would enforce what it had termed “a commitment” from banks to keep executive pay in check, restrict dividends and ensure that lending to homeowners and small businesses eases in return for their access to public funds.

Prime Minister Gordon Brown responded with a statement the following day promising that irresponsible bankers would be punished. The £37bn capital for RBS, HBOS and Lloyds TSB is conditional on the Government approving independent directors on the banks’ boards, lending at 2007 levels, not paying dividends until the Government shares are redeemed and not paying bonuses to board members this year.

John Charcol senior technical manager Ray Boulger welcomes the Government’s attempt to cover all bases with its rescue package but says it is too early to assess whether it will be enough.

He says the advantage of the UK scheme is that, by bolstering banks’ balance sheets, they are able to continue to hold assets, the Government does not face the daunting prospect of trying to value assets so it can buy them up.

Boulger says: “Those assets will ultimately pay out some- thing but if the Government were to buy them itself, it would have to be very careful over the price it paid.”

He is hopeful that the recapitalisation of banks may avoid the need for the “bad bank” approach that has been taken in the US.

Homefunding chief executive Tony Ward says the UK rescue package is better constructed than the US bailout. He is concerned that the sum of money put up by the US government and the method of doing so will not go far enough as there are suggestions there could be more bank failures on the horizon.

Ward believes the moral hazard argument that banks should be allowed to fail has run out of currency as the systemic dangers have been shown to be too great.

He says letting Lehman Brothers fail was a mistake as it created a systemic market panic but he has confidence that when the Prime Minister and Chancellor Alistair Darling say they will do “whatever it takes”, they really mean it.

Many in the industry have argued that Government intervention is on a bigger scale than would have been required if it had acted more promptly, even though it is difficult to imagine there would have been the same cross-party support if the events of the past few weeks had not compounded the need for urgent and dramatic action.

Ward says: “If the Government had actually woken up a couple of months ago when some of us were warning about a systemic failure with a significant impact for the real economy, it probably would not have had to do as much as it has.”

One of the concerns raised by the Council of Mortgage Lenders is that specialist lenders will not be eligible for the scheme but the Treasury has not definitively ruled them out.

Its statement says applications from any UK- incorporated bank will be considered but, given that it will judge this against the institution’s role in the UK banking system and the economy, it is unclear whether any specialist lenders will benefit.

Intermediary Mortgage Lenders’ Association executive director Peter Williams says there is “a glimmer of hope” that this could help the full spectrum of lenders.

Stroud & Swindon sales and marketing director Linda Will is optimistic that the package may be enough to galvanise the markets into action but she believes the Government will do more if necessary.

She says: “The action is stronger than guaranteeing deposits as this would only cure the symptom and not the disease. By strengthening capital to allow banks to lend and guaranteeing interbank loans, this is addressing each point in the money movement triangle and reinforcing it.”

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