UK Treasury has announced series of measures to rescue its financial system. The media was full of reports this morning (see Bloomberg; BBC1, BBC2) that a scheme was on the anvil and UK Government has obliged.
There are 3 press releases from UK Treasury:
- Summarising all the old and new schemes
- A seperate statement on UK’s new initiative - Government’s Asset protection scheme.
- A statement on RBS – In this government has swapped the previously infused preference share capital with ordinary share capital so that dividend payout does not happen; no extra capital to be infused.
Under the new schemes, there are quite a few. UK could also follow the US route and use acronyms for its various schemes. Reading through them is a sure shot way to get a headache. Here is a broad summary:
- Credit guarantee scheme (CGS): This guarantees debt of financial institutions. It was announced earlier but CGS was to shutdown on 9 April 2009. This has been extended to 31 Dec 2009.
- Guarantee scheme for asset backed securities (GSABS): A new facility which will provide guarantees to AAA rated (do they matter now??) asset backed securities. This would include ABS backing mortgages, corporate and consumer debt. Subject to approval and would start on April 2009. Why the delay? Is it just a signal?
- Bank of England liquidity facilities (BoELF): A 30 day liquidity facility to close down on 30 Jan 2009. To be replaced by 364 day facility.
- Bank of England asset purchase facility (BoEAPF): Treasury will issue T-Bills and give the monies to BoE. BoE will then use the money to buy toxic assets from the banking system. This is to be a 50 GBP scheme and begins on 2nd Feb. Which assets??The Bank will be authorised by the Treasury to purchase high quality private sector assets, including paper issued under the CGS, corporate bonds, commercial paper, syndicated loans and a limited range of asset backed securities created in viable securitisation structures.Guarantee scheme for asset backed securities and starts in April 2009 and here UK Treasury is allowing BoE to purchase ABS in Feb 2009. So purchases come first and guarantees later! It should be other way round. This is absurd at its best!! And look at all this investment banking US Treasury-Fed style. Why can’t they follow simple structures?? A similar thing was seen in Swiss version of TARP.
- Government’s Asset protection scheme (GAPS): This is the insurance fund which the above pointed media releases pointed.
Under the Scheme, in return for a fee, the Treasury will provide to each participating institution protection against future credit losses on one or more portfolios of defined assets to the extent that credit losses exceed a “first loss” amount to be borne by the institution. It is intended that the Scheme will target those asset classes most affected by current economic conditions.
The Treasury protection will cover the major part but not all of the credit losses which exceed this “first loss” amount. Each participating institution will be required to retain a further residual exposure, which is expected to be in the region of 10 per cent. of the credit losses which exceed the “first loss” amount. This residual exposure will provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum.
So, the purpose is you lend and in case of losses above the first loss amount, the Government will bail you out by providing for the losses. The eligible assets under the scheme are (they could be in any currency):
- Portfolios of commercial and residential property loans most affected by current economic conditions;
- structured credit assets, including certain asset-backed securities;
- certain other corporate and leveraged loans;
- and any closely related hedges, in each case, held by the participating institution or an affiliate as at 31st December 2008.
This is a huge plan and if done wrongly could lead to huge moral hazards. I mean how do you calculate first loss amounts when the entire markets have frozen? And with guarantees for ABS coming later, this market will not take-off any soon. The statement says further details of the scheme to be out by last week of Feb. So looks like another signalling device to support free- falling of bank share prices in UK.
- The statement also has a note on Northern Rock . It says NR is not planning to cut its mortgage books. This is to provide a boost to mortgage markets. But how else would NR deleverage?
- There is also a statement on Capital regulation which says capital ratios of banks are not being increased as of now.
This was the summary of the various UK measures. One can even understand these schemes from the functional perspective:
Extending the Duration of Loans – BoELF
Increasing Acceptable Collateral – (BoE has extended the list of acceptable program under BoELF)
Extending the Reach of Lending Facilities – GSABS, BoEAPF, GAPS, CGS
Overall, there is a huge US overhang here. It is I-banking at its best. I don’t know whether UK Govt and regulators are increasing their employment numbers. If they are not then I dont know who would run these schemes. If they are, then it looks as if the schemes are being created to employ the laid-off people from the UK’s financial world (which looks like the case for US as well).