Turning on the lending spigot

25 November 2008 By Hugo Dixon

Authorities on both sides of the Atlantic are rightly gearing themselves up for action with new ideas unveiled on Tuesday. But governments must also say two things: that they don t mind banks charging fat margins; and they don t mind if their capital ratios fall.

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The US Treasury said that it would allocate $20bn to back a new lending facility for the consumer assetbacked securities market through its Term Asset Backed Securities Loan Facility on November 25. The asset backed securities market provides liquidity to financial institutions that lend to small business and consumers.

Under the new facility, the Federal Reserve Bank of New York will lend up to $200bn on a nonrecourse basis to holders of newly issued AAArated ABS for a term of at least one year.

The Federal Reserve said it would buy up to $100bn of debt from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. It will also buy $500bn of mortgagebacked securities backed by those mortgage lenders.

Mervyn King, governor of the Bank of England, told the House of Commons Treasury select committee the single most pressing challenge was to break the logjam in lending on November 25. King said a recapitalisation or readjustment of bank capital requirements may be necessary.

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Under the new facility, the Federal Reserve Bank of New York will lend up to $200bn on a nonrecourse basis to holders of newly issued AAArated ABS for a term of at least one year.

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