Yesterday, the U.K. Treasury announced a “comprehensive package designed to reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy.” The U.K. government aims to address its lending problems by:

  • Extending from April 9, 2009 to December 31, 2009 the drawdown window for new debt under the Government’s Credit Guarantee Scheme (CGS), which is designed to reduce the risks on lending between banks;
  • Establishing a new facility for asset backed securities which will commence in April 2009, subject to approval under European Commission state aid rules;
  • Extending the maturity date for the Bank of England’s Discount Window Facility, which provides liquidity to the banking sector by allowing them to swap less liquid asset, from 30 days to 1-year for an incremental fee of 25 bps;
  • Establishing a new Bank of England facility for purchasing high quality assets – U.K. Treasury has authorized initial purchase of up to £50 billion;
  • Offering capital and asset protection scheme for banks, with proposals for this to be coordinated internationally, discussed further below; and
  • Clarifying the regulatory approach to capital requirements, through an announcement by the Financial Services Authority (FSA), consistent with the Basel Committee’s recent announcement of “enhancements” to the Basel II capital framework.

The announcement builds on previous U.K. government measures to support the economy through the economic downturn, specifically its recapitalization plan announced in October and last week’s measures to support lending to small and medium sized businesses. Certain of these initiatives also resemble measures implemented in the United States, including the Federal Reserve’s $200 billion Term Asset-Backed Securities Loan Facility and $600 billion GSE and MBS purchase programs.

Separately, the U.K. Treasury announced a new Asset Protection Scheme that is is “designed to protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets.” Under the Scheme, in return for a fee, the U.K. 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.” The Scheme is targeted at the asset classes most affected by current economic conditions. At present, the Scheme is available to U.K. incorporated authorized deposit-takers (including U. K. subsidiaries of foreign institutions) with more than £25 billion of eligible assets. The following categories of assets are expected to be eligible for the Scheme, subject to assessment by the U.K. Treasury:  

  • 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 December 31, 2008.  

Although a comprehensive asset guarantee scheme has not been adopted in the United States, the U.S. Treasury, FDIC and Federal Reserve have announced stop-loss arrangements with Citigroup and Bank of America that are intended to address similar concerns.

The U.K. government initiatives remain subject to EU state aid approval.