This snapshot taken on 07/04/2010, shows web content selected for preservation by The National Archives. External links, forms and search boxes may not work in archived websites.
Newsroom & speeches
12 May 2009
Check against delivery
I’d like to begin by thanking Adair Turner for inviting me to speak to you. It is a pleasure to be here and to see such a strong turnout today.
The next session on the agenda focuses on mortgage funding.
I’d like to set out first a few observations on recent events and the challenges we face from my perspective as a Treasury Minister.
In the decade to 2007, financial markets around the world were characterised by remarkable change, financial innovation, rapid growth and prosperity.
The UK mortgage market was no exception.
Mortgage lending increased from £31 billion in the third quarter of 2000 to £98 billion in the third quarter of 2007.
Foreign banks entered the market, increasing lending capacity. Specialist lenders joined the market, accounting for around 20% of market share by 2007. A network of credit intermediaries developed to support non-traditional lending. Buy to let lending grew at a rapid rate.
Competition in the market drove down margins and widened access to homeownership.
Competition also brought a wide, and sometimes bewildering range of new products - including, for example, flexible mortgages, offset mortgages, and 100% plus loan to value lending.
A global environment of low interest rates underpinned relatively cheap funding, encouraged higher levels of borrowing, and encouraged investors to search for new risk taking opportunities.
Capital regulation and the Basel I Accord encouraged the growth of off balance sheet funding vehicles.
The result was a shift towards wholesale funding models and increased borrowing from capital markets.
Between 2000 and 2007 the global volume of securitisation issuance grew from around $554bn to around $1910bn [almost $2 trillion].
Residential mortgage backed securities (RMBS) – in the UK – and covered bonds markets – in Europe – financed the growth in the lending market. In the UK, these markets grew from £13bn to £257bn between 2000 and 2007.
These markets were perceived to be low risk. Recent events have shown that they were not always low risk.
The market misjudged and mispriced risk. And there was a failure to take shared responsibility for the integrity of the financial system.
Since 2007, financial markets everywhere remain in a fragile state. Financial instability has also led to a steep global economic downturn.
There has been a loss of confidence in the health of financial institutions, and the viability of funding models, and an implosion of investor demand for structured finance. There is considerable uncertainty about the actions of credit rating agencies.
In 2008, industry figures show that total global securitisation issuance was down by 81.5% on volumes issued in 2007. First we experienced a period of extraordinary growth- now we see an extraordinary deterioration, or contraction.
In the UK, access to wholesale funding markets is effectively closed, and lenders must look elsewhere to refinance maturing debts and fund new lending.
Since 2007 there has been sharp reduction in lending – reflecting the influence of both demand and supply side factors. Margins have increased and the availability of products has fallen.
Set against this, more recently, and as a result of the action we have taken since last autumn, a number of firms have announced plans to increase their lending to households and businesses over the next 12 months.
We now have the lowest interest rates on record. This is providing help now to those with variable rate mortgages and loans.
The challenge for policy makers is to keep pace with change so that we can take action where it is necessary.
Governments around the world have had to take exceptional steps to stabilise and strengthen the financial system.
In the UK, the Government and Tripartite Authorities are taking action on an unprecedented level, targeted both on specific institutions, and also system wide, to stabilise the financial system and support new lending.
The Government’s recapitalisation scheme announced last year has allowed banks to raise capital to hold against their loans, increasing confidence in the system.
Alongside this, the Bank of England has made liquidity available through its Special Liquidity Scheme open from April 2008 to January 2009 and the subsequent Discount Window Facility established in October last year. The Government implemented a Credit Guarantee Scheme to guarantee borrowing by qualifying banks and building societies in the markets.
At last month’s Budget the Chancellor also launched an Asset Backed Securities Guarantee Scheme, extending funding options open to banks through the Credit Guarantee Scheme to high quality Residential Mortgage backed Securities (RMBS).
We have also announced that we have reached agreements in principle with two banks on establishing an Asset Protection Scheme. This will protect banks against losses on some historical assets, increasing confidence, improving their capital position and allowing them to make additional new lending.
We have not acted in order to support particular institutions, but to safeguard consumers and taxpayers, and to strengthen confidence in financial markets. Strong financial markets are the foundation of economic recovery.
Of course it will take time for the effects of all of these actions to be felt in the markets - we cannot expect things to be fixed overnight - but we have laid the foundations for a strong and sustainable recovery.
I want to make some observations about the framework for recovery that we have set in place.
It is clear that there can be no simple return to the past. We cannot expect to return to the lending volumes, pricing and funding models of 2007.
The instability of the financial system has exposed shortcomings, and we must recognise that attitudes to risk and leverage have fundamentally changed.
It is important that we demonstrate that the UK is open for business, and that foreign banks, and overseas investors feel confident about rejoining the sector.
The Chancellor and Sir Win Bischoff’s report that was published last week stressed the importance of maintaining our international competitiveness in financial services. I agree with the conclusions of that report. To do this we must work in partnership and continue the close dialogue between Government and industry.
It is important that the UK market continues to be competitive and innovative, offering a wide range of affordable mortgages – available to the full range of borrowers.
The Government guarantee programmes are temporary. We want to see a speedy return to a well functioning and independent market.
Of course, there are long term challenges for us all in this.
Firstly, we need to keep pace with change.
In order to improve our understanding of lending markets, the Chancellor and the Secretary of State for Business and Enterprise established a new Lending Panel at the end of last year.
As part of this, I am delighted to chair the Home Finance Forum, which brings together Government, lenders, trade associations, consumer groups and regulators to monitor mortgage lending, reporting to the Lending Panel.
The HFF has proven to be a good addition to the communication channels that exist between industry and Government. I value the members and their contributions for the frankness and candour with which they approach our common endeavour of getting mortgage markets working again. I would like to thank the many people in the room here today who are members of the Forum for their hard work.
The Bank of England’s new monthly report – Trends in Lending – the first of which was published on 21st April 2009, is part of our new monitoring approach.
The work of the Lending Panel will help to strengthen our understanding of change to enable us to have an informed dialogue with you, and help us to take all necessary action for the recovery.
It is important that wholesale funding markets recover and develop in a more sustainable way.
We want to see new standards, helping to restore confidence and extend market appeal to investors.
At the Pre-Budget report last year we encouraged the industry to improve standardisation and transparency in RMBS markets. The European industry has taken steps to develop best practice on information disclosure. I encourage the industry to do more to push forward this work.
At the Budget the Chancellor announced that the Authorities would review the regulatory regime for covered bonds, introduced one year ago. Covered bonds play a significant role in European capital markets. Working with you, we will consider how to help support the development of the market in the UK. I encourage you to play a full part in our discussions.
I also want to see choice and diversity maintained and this means institutions like mutuals continuing to play an important role in financial markets.
I support the benefits that mutuals bring to their members and to the wider community.
The mutual model has proved relatively robust in the financial crisis, but the features which make it stable are proving challenging for some in the current low interest rate environment.
We recognise that we need to modernise and update the legislative and regulatory framework if the sector is to continue to thrive.
So this year, Government has passed legislation enabling the business of one mutual to merge with the subsidiary of another UK or EEA mutual society. This was followed by the announcement from the Co-operative Group and the Britannia Building Society of their proposal to merge.
Further to this, the Chancellor announced in the Budget that we will enable the removal of tax barriers to transfers of business between mutual societies.
And we will soon bring forward legislation to amend credit union and Industrial & Provident Societies legislation.
One of the consequences of recent events is that confidence and trust in the financial system has declined. We need to rebuild trust, restore ethics and ensure fair treatment of consumers.
In order to rebuild trust we need to look again at the way that we regulate the financial sector. The Chancellor asked Adair to report on improving financial regulation and I welcome his review published in March.
Taking into account Adair’s work, and of course the agreements reached this spring at the G20 summit, the Treasury will publish a paper shortly outlining our approach to the future of financial markets and set out the actions we intend to take to achieve this.
This will look across a wide range of areas, including renewing financial services regulation; reducing the impact of the failure of individual financial firms; strengthening consumer protections, and improving efficiency in financial markets in light of recent events.
We are taking the steps necessary to put the banking sector on a stronger footing, while providing support to homeowners and business that need it now. We will continue to do so.
I look forward to the discussions today.
