SimplyFinance - Banking

Bank of England Announces Swap Plan

2008-04-21T23:00:00Z

On 21 April 2008, the Bank of England launched a plan “to allow banks to swap temporarily their high quality mortgage-backed and other securities for UK Treasury Bills.”

Due to distressed financial times, many securities’ markets have closed, creating an “overhang” of these assets on their balance sheets, leaving them without means to raise funds. Consequently, banks have not been making new loans, even to other banks.

Within this plan, banks will be able to exchange high quality illiquid assets for Treasury Bills. Although this scheme has the potential to help the banks, it is not a bailing out. The responsibility for any losses on the loans is still with the bank, and they will be charged a fee.

The three main features of the scheme are that: 1) each exchange is valid for one year, with the option to renew for a total of three years, 2) the banks remain responsible for the risk of losses on their loans, and 3) the swaps cannot be used for new lending, applying only to assets from the end of 2007.

Mervyn King, Governor of the Bank of England, said, “The Bank of England’s Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks.” If confidence is strengthened, it is likely that commercial banks will then pass on the BoE’s recent cuts on a key interest rate to debtors.

Beginning yesterday, the banks are eligible to enter into new asset exchanges during a six-month window. These exchanges will be valid over a period of one year. The Bank of England will then decide which banks may renew the exchanges, on a year by year basis, for up to three years. After which time, the scheme closes. The duration of these exchanges has been determined as sufficient to give banks a much needed boost of confidence. Banks will pay a fee for this plan, which is based on the 3-month Libor.

Because this scheme is only available for loans that were already made by the end of 2007, this exchange will not apply to new lending. The Debt Management Office will supply the Treasury Bills to the Bank of England in exchange for already made “high-quality assets, including AAA-rated securities backed by UK and European residential mortgages” (not any backed by the U.S.).

The plan is to begin with around £50bn, all the while being dependent upon current market conditions.

Increased Security for UK Depositors

2007-10-12T07:00:00Z

Following the crisis surrounding Northern Rock (one of the UK's largest mortgage lenders) last month, the UK Treasury has decided to make some changes to the UK banking system and to the level of depositors' security.

On September 14, it became public information that the Bank of England made funds available to Northern Rock to cover £3 billion in publicly funded loans, and as a result of this knowledge becoming public, Northern Rock customers started queuing up to withdraw their money.

Northern Rock was unable to obtain loans from other banks because many are still unstable after the recent downturn in the sub-prime mortgage industry in the US. The Bank of England tried to ensure Northern Rock's customers that the bank was still solvent, but people still panicked and decided it was best to withdraw their funds.

At the time this occurred, only the first £2,000 of UK bank customers' money was guaranteed 100%, and the next £33,000 was only insured 90%.

Since the crisis at Northern Rock, Alistair Darling, UK's treasury chief, has decided to meet the public's concerns about the way the UK banking industry is being managed by implementing a guarantee plan similar to that of the United States Federal Deposit Insurance Corporation (FDIC). Implemented earlier this month, Darling's guarantee plan ensures that if there were to be a banking collapse, depositors' money will be 100% insured up to £35,000. This amount matches the security provided to customers during the Northern Rock incident.

UK Housing Market Molds Saving Habits

2008-01-30T00:00:00Z

According to the FT.com, the number of UK households regularly committing part of their income to a savings account has barely increased in the last fifty years. However, the amount of money being saved has increased dramatically from less than £1 billion in 1957 to £43 billion in 2008.

National Savings & Investment says that the increase in the amount of money being saved and the decrease in the number of households doing the saving is due to at least three factors including a move away from cash-based savings, a trend toward keeping money in a savings account for a long period of time, and an increased desire to hunt for accounts with the best and highest returns. NS&I states that the rise in the amount of money being saved is also due to the increasing affluence of those doing the saving.

FT.com says that more than half of all UK households don't save regularly, but the number of households that do has increased from 37 percent in 1957 to 43 percent today. It is thought that the decision to save is based on the age and the lifestyle of the household in question. The closer the people of the household are to retirement age, the more likely they are to commit money to savings on a regular basis.

According to Vicky Redwood of Capital Economics, another reason for the decline in traditional forms of saving is that the UK housing market has been very strong in recent years, particularly in the past ten years. Thanks to the strength of the market, more and more households are saving by taking out a mortgage on their home and prioritizing the repayment of that loan. If the housing market remains strong, the equity they build up in their homes will serve as a non-traditional form of savings or as a pension plan for retirement.

According to NS&I, five percent of the the disposable income of UK savers was allocated to savings accounts last year. It is predicted that if the UK economy begins to falter, the number of households regularly committing funds to savings will increase dramatically. When job security decreases along with housing prices, people tend to place more importance in savings.

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