fundamental alert

U.K. Treasury Announces Change Intended to Increase Bank Lending

Monday, 15 December 2008 16:35:58 GMT  |  Roman Kadinsky, DailyFX Research

Speaking before Parliament today, Chancellor of the Exchequer Alistair Darling announced a major change in the UK’s October rescue plan that is intended to hasten the pace of lending back to 2007 levels. Under the previous arrangement, banks could sell bonds to the Treasury that paid 0.5% interest per year in addition to a fee based on the average cost of 5-year Credit Default Swaps (as well as additional charges if denominated in foreign currency). The revised deal changes the additional fee to be based on the average cost of securities guaranteed between July 2007 and 2008, and also allows acceptance of a broader range of currencies than previously allowed.

Despite the measures, and the 37 billion pound recapitalization of banks, lending in October for new house loans was just a third of the 104,000 monthly average in 2007. Recent rate cuts have also not had their full intended effect as rates for new mortgage loans are not dropping as quickly. Gordon Brown also said the government would increase the amount it will lend, at no interest for five years, to first-time homebuyers to 400 million pounds (from the previous 300 million allotted). The measures released today aim to lower rates for new mortgage loans and lessen the length of recession in the U.K. by spurring on lending. No immediate reaction from currency markets has been observed, though the GBP/USD has seen a large rise back above 1.50 today.

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