This snapshot taken on 23/10/2008, shows web content selected for preservation by The National Archives. External links, forms and search boxes may not work in archived websites.
Newsroom & speeches
21 April 2008
1. With your permission Mr Speaker, I would like to make a statement about this morning's announcement by the Bank of England to improve conditions in the financial markets.
2. The scheme has been developed following extensive discussions with the Treasury and the Financial Services Authority.
3. Mr Speaker, I also want to report on the recent G7 meeting in Washington on restoring financial stability to financial markets.
4. And I will also report on measures we are taking here at home to strengthen the stability of the banking system, as well as to help homeowners with their mortgages.
5. Mr Speaker, before I set out in further detail the Bank of England's special scheme, let me remind the House of the background against which it has been developed.
6. The financial markets throughout the world remain turbulent, following the problems that arose in the US housing market last year.
7. Functioning financial markets rely on banks and building societies being able to raise finance from each other - and from other investors - including through securitisation markets and through inter-bank lending markets.
8. These funds can then be used to finance lending to businesses and consumers, including for the provision of mortgages.
9. But global financial markets are currently not functioning normally.
10. Across the world there is a lack of confidence in credit markets - most notably mortgage backed securities. That lack of confidence was prompted by the downturn in the US housing market, and in particular with the problems associated with sub-prime mortgages there.
11. Banks are reluctant to lend to each other, and as result lending to customers is more expensive and more restricted.
12. Mr Speaker, along with other Central Banks, the Bank of England has over the last few months made additional funding available to the markets through its regular market operations.
13. The UK financial system remains fundamentally strong and the Bank of England's action has helped take some of the pressure out of the system by giving the banks additional liquidity to continue their usual banking operations.
14. Last week, it made a further £15 billion available over three months, as part of its open markets operations.
15. And the Governor has said that he is committed to providing the liquidity assistance that the system as a whole needs to function normally.
16. Here at home, the economy continues to grow. Last week's figures confirm that unemployment remains low and employment high. That and the recent interest rates cut will provide wider support for the housing market and the wider economy.
17. As banks here and across the world disclose their losses and strengthen their financial positions, which will help rebuild confidence, the Bank of England can now take action to ease conditions in the financial markets, particularly in relation to mortgaged backed securities.
18. Mr Speaker, the special scheme announced by the Bank of England today is a further step towards tackling these problems, which have become more evident in recent weeks, with the increasing cost and decreasing availability of lending by banks and building societies.
19. Under the new scheme, for a 6 month period, the banks and building societies and other institutions that are eligible for the Bank's standing facility will be able to enter into agreements with the Bank of England under which they exchange high-quality asset-backed securities for Treasury Bills.
20. They can then hold these Bills or trade them in the markets. Each exchange agreement will be for a maximum of a year, but can be renewed at the Bank's discretion, so that the exchange could be ultimately for up to three years.
21. The arrangement is available only for assets existing at the end of December and does not apply to new lending since then.
22. At the end of the scheme the banks will return the Treasury Bills to the Bank of England, and will receive back the securities which they had provided as collateral.
23. This means that the banks will continue to hold the risk on the securities they provide, so it is them rather than the Bank of England that will be exposed to any fall in value.
24. At all times the banks must provide as security to the Bank of England, assets worth significantly more than the Treasury Bills they receive in return.
25. If the value of their assets fall, the banks must provide more assets to the Bank of England or return some of their Treasury Bills.
26. They will be charged a commercial rate, so there is no subsidy to the banking sector.
27. Mr Speaker, the Bank of England expect the initial take-up to be £50 billion. They will monitor the position daily, both to check new bids from the banks, and to track the value of the assets exchanged as collateral.
28. Mr Speaker, the Treasury is supporting the scheme announced by the Bank of England, by lending to it - at a commercial rate - the Treasury Bills which they will then exchange with the banks and building societies.
29. As the House will know, the Government stands behind the Bank as its sole shareholder and we are making this clear by providing an indemnity.
30. Mr Speaker, the Bank of England believes that these measures will support the banking sector during the present period of uncertainty and will help restore the stability that the financial markets need now. Both now and in the longer term.
31. This will help alleviate the problems that have seen banks reluctant to lend to each other and in turn support the provision of new mortgage lending.
32. Mr Speaker, maintaining economic and financial stability is the Government's key priority.
33. In addition to the Bank of England's announcement, I can confirm to the House that the Government will take further action at home, and internationally, to restore stability in financial markets.
34. It is important that banks continue to make full disclosure of their exposure to losses and do so as soon as possible.
35. That is why at the G7 and IMF Committee meetings in Washington we agreed that banks should be as open as possible - and as quickly as possible - in order to remove the continuing uncertainty as to their true positions.
36. This process has started throughout the world including here in Britain, with banks disclosing their losses and making proposals to rebuild their capital position.
37. Transparency is an essential part, along with other steps we are taking, of stabilising financial markets.
38. And, in Washington last week the Financial Stability Forum agreed a range of actions - some of it implemented in the next three months, others for the longer term.
39. We agreed to strengthened oversight of risk management including capital and liquidity; clearer standards for valuation and transparency; and changes in the role and use of credit ratings.
40. We will strengthen international co-operation so we are better able to prevent crises and deal with problems that occur.
41. We are also working with the IMF to allow them to play a greater role in providing an early warning of the threats to financial stability, so that the relevant authorities can take early action to prevent these actions in the future.
42. Mr Speaker, here at home, we are about to finish consulting on the reforms to the banking system that I announced in January.
43. These reforms will make it easier to intervene in the event that a bank gets into trouble, in order to protect depositors and maintain the stability of the financial system.
44. Because it is important that we get this right, I will continue to hold further discussions with the industry on the detail of these proposals before bringing forward legislation.
45. We will also make changes to the Bank of England to emphasis its role in maintaining financial stability.
46. The responses we have received so far to the consultation have made it clear that given the importance of these reforms it is crucial that we have further discussion, and once that is completed I can confirm that it remains our intention to introduce legislation this session to strengthen financial stability and depositor protection.
47. The legislation needs to be on the statute books early next year when some of the provisions of the Banking (Special Provisions) Act are due to expire.
48. Finally, Mr Speaker we are determined to do everything we can to help homeowners, so I am meeting the Council of Mortgage Lenders, the Finance and Leasing Association and major lenders tomorrow along with the Chief Secretary to the Treasury and the Housing Minister.
49. Since 2004, mortgage-lenders have been required by statute to treat their customers fairly, and at our meeting I will be discussing how banks and building societies can help people whose fixed rate mortgages are coming to an end, as well as helping people who may get into difficulties in repaying their mortgages.
50. Banks and building societies have a duty to treat their customers fairly, and in the light of everything we are doing with them, I want to discuss with them how they can pass on the benefits of falling interest rates as well as wider Government support to mortgage holders.
51. The Government will continue, along with the Bank of England and the Financial Services Authority, to do everything it can to maintain stability.
52. Mr Speaker, the announcement by the Bank of England this morning will help resolve the problems in the wholesale financial markets with their subsequent impact on the retail markets - so helping business, individuals and in particular the mortgage market.
53. And I commend this statement to the House.
