The European Commission has approved, under Article 87(4)(b) of the EC Treaty, the UK Asset-Backed Securities Guarantee Scheme. This new measure is intended to restore one of the main sources of leverage used by UK banks: mortgage lending. Under the scheme, the UK Government will provide full or partial guarantees to eligible asset-backed securities including portfolios of mortgages. Guarantees allocated under the scheme will be limited to a total of £50 billion. The instruments eligible under the scheme are bonds issued by vehicles sponsored by UK banks and building societies that have a substantial business in the United Kingdom.

The Commission concluded that the aid scheme meets the conditions in its Communication on the application of the State aid rules to banks during the financial crisis [See “On the Subject” 31 March 2009]. The scheme will enable banks to acquire liquidity and will become a fundamental element in underpinning lending to the UK real economy.

The Securities Industry and Financial Markets Association (Sifma), together with its affiliate, the European Securitisation Forum, has welcomed the scheme as an important solution to increase funds available to banks in order to promote lending to homebuyers and homeowners.