Yesterday, the European Commission (EC), pursuant to the EC Treaty state aid rules, approved the UK’s Asset-Backed Securities Guarantee Scheme which is “intended to expand the funds available to banks to promote lending to homebuyers and homeowners.” The scheme is part of the measures the UK has adopted to support its banking industry. Under the scheme’s framework, “investors will benefit from the guarantee provided to securities issued by special purpose vehicles collateralised with residential mortgages. Guarantees allocated under the scheme will be limited to a total of £50 billion.” The special purpose vehicles will be sponsored by financial institutions or “building societies that have a substantial business in the UK.”

The Commission concluded that the UK’s support measures were compatible with the present EC Treaty rules that permit the adoption of measures to remedy serious disturbances in a Member State's economy. European Union Competition Commissioner Neelie Kroes remarked, that “[t]he Commission is satisfied that this measure will help to reactivate the UK Residential Mortgage Backed Securities market and facilitate the restoration of more competitive mortgages for UK borrowers whilst avoiding disproportionate distortions of competition.”