On 19 January, Treasury announced more measures to reinforce financial stability. It announced:
- extension of the drawdown window under the Credit Guarantee Scheme: the window will be open until the end of 2009, subject to State Aid approval;
- a new facility for asset-backed securities: under the scheme, in return for a fee, Treasury will provide to each participating institution protection against future credit losses on one or more portfolios of defined assets (likely to be asset classes most affected by economic conditions). The institution must bear a “first loss” amount and retain a further residual exposure, which is expected to be in the region of 10% of the credit losses which exceed the “first loss” amount. Initially UK incorporated authorised deposit-takers (including UK subsidiaries of foreign institutions) with more than £25 billion of eligible assets can use the scheme, but Treasury might extend it later. The institution will continue to manage assets included in the scheme and will keep them on its balance sheet but must “ring-fence” them so that actions in relation to them, including enforcement and disposal, will be subject to appropriate Treasury controls. Any institution wanting to participate must satisfy Treasury it has adequate resources and senior management and a stable business plan;
- extension of the maturity date for the BoE Discount Window Facility: BoE will allow access for 364 days on a payment of an additional 25 basis point fee relative to swaps entered under the normal 30-day window. Its Special Liquidity Scheme will close on 30 January but will provide liquidity support for a further three years from that point;
- a new Bank of England facility for purchasing high quality assets, offering capital and asset protection scheme for banks, with proposals for this to be co-ordinated internationally; and
- clarifying the regulatory approach to capital requirements, through an announcement by FSA. FSA believes the capital regime should incorporate counter-cyclical measures so banks build up capital buffers in good years which they can draw down during economic downturns. This general principle has been supported by the Financial Stability Forum and is now being taken forward by the Basel Committee (see below). FSA has clarified it now expects each of the participating banks to have a minimum core tier 1 of 4%. However, it will make other changes that will significantly reduce the requirement for additional capital resulting from the procyclical effect.