It has been suggested by one former Bank of England economist that preventing a second credit crisis is going to take some extreme measures. Danny Gabay has a strong opinion about how the credit situation can be improved. He believes the UK banks should sell their mortgage loans to the Bank of England at a generous discount – more than 20 per cent.
This mortgage loan disposition would give banks the ability to free liquidity and improve balance sheets. This idea is in stark contrast to the current procedure of Quantitative Easing which allows the Bank of England to create new money to purchase gilts from financial institutions, creating better credit conditions.
Fathom Consulting, of which Danny Gabay now heads, contests its plan would provide a more impactful way to free up money. The group claims that the improvement in lending would directly lead to quicker economic recovery and help prevent a second credit crisis.
Gabay commented on the necessity to repair the banks, saying: “You have to fix the banks or we’re not going anywhere. The bottom line is that the economy is carrying too much debt, and while the government has taken the first steps towards dealing with its balance sheet, the household sector has barely begun.
“More QE is needed, but we need a fresh approach that acknowledges the source of the problem and we need urgent action to address that problem. Our plan, in our view, offers a way forward.”
Tony Ward, Home Funding’s chief executive, also commented on the possible solution and the impact selling mortgage loan assets would have on them, saying: “Forcing banks to sell at this much of a discount would be a bad thing. That would write 20% off against banks’ tier one core capital, which would give them liquidity but it correspondingly restricts the amount banks can lend against because their capital takes a hit.
“More sensible would be for the Bank to buy mortgage portfolios at par or to buy mortgage backed securities or covered bonds instead of gilts.
“If they did that it would achieve two objectives: one, it would put liquidity into banking markets without a write down against capital; and two, the fact that the Bank was prepared to purchase MBS would be a positive thing for investor confidence worldwide. That would impact considerably on the secondary markets.”
Fathom’s idea was displayed at its quarterly Monetary Policy Forum in London to a few Monetary Policy Committee members. The group included past MPC members Deanne Julius, Sir John Gieve and Rachel Lomax.
Before the monthly MPC meeting on Thursday, Lomax and Gieve remarked that they would decide to maintain the current rates and vote to freeze QE. Julius said if she were still part of the committee she would have voted for a rate rise. Gieve mentioned that he still expects very fast rises in the base rate.
Julius expressed an opinion regarding Fathom’s mortgage buy-all program. He used the analogy of Freddie Mac and Fannie Mae for the US, which both had to ultimately be bailed out.
Fathom refuted, its plan more closely resembled the US TARP program.
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