UBS analyst Alistair Ryan has taken a stab at the level of use by British banks of the governments’ emergency facilities. His estimate, that it may total £200 billion or perhaps even higher.
To put it in context: the UK’s GDP is roughly $2.8 trillion. The US economy is a bit under $14 trillion, or nearly 5 times bigger (note that on a purchasing power parity basis, the size difference is even greater, over six times). If you use an exchange rate of $1.8 = £1, that £200 billion is equal to $360 billion. The support to the banking system is roughly 75% of the size of the usage made of the Fed’s facilities (remember, some like the PCDF, vary a lot over time, while the TAF seems to be fully subscribed) for an economy 20% as large.
Ryan’s estimates may simply be too high. But even if he is off by 100%, British banks are making far heavier use of life support than their US counterparts.
From the Telegraph:
Troubled lenders in the UK may have tapped the Bank of England’s emergency funding scheme for as much as £200bn,
according to investment bank UBS – double the most aggressive estimates.
Alastair Ryan, UBS banks analyst, has calculated that “the take-up could be £200bn or more”.
When Bank Governor Mervyn King first unveiled the Special Liquidity Scheme in April he indicated that it might be used for £50bn, while debt specialists forecast a total take-up of £90bn-£100bn by the time the scheme closed on October 20.
A Bank spokesman said yesterday: “As has always been the case, there is no cap on the scheme. Its size will reflect its use.”
The scheme, which allows banks to swap untradeable mortgage securities for liquid Treasury bills for up to three years, has filled the funding hole left by the closure of the wholesale markets since the credit crisis. The last major syndication of mortgage securities was in June last year.
Mr Ryan believes banks are using the scheme to replace maturing funding lines, as well as to fund future lending and past lending that would normally have already been syndicated.
Such action would tally with assertions by Sir James Crosby in his recent mortgage report for the Treasury that “the shortage of mortgage finance will persist throughout 2008, 2009 and 2010” and that banks must find £40bn a year to meet their existing obligations before making any new loans….
The Bank for International Settlements on Monday revealed that UK lenders issued a record £45bn of mortgage-backed bonds in the three months to June in order to use the scheme…..
Bankers and economists were surprised by the forecast, calling it “unlikely but plausible”.
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Watching the slow meltdown in the UK will give us a very good idea of events to come here in the US.
I think things are quite a bit worse in the UK than they are here, anonymous #1.
Their housing and debt bubbles were markedly worse than ours; financial services are a greater portion of their GDP; and they don’t have much of a commodity cushion to fall back on, as the North Sea runs dry. We’re still a remarkably resource-rich nation, and we do have the reserve currency now. The pound hasn’t been that in a long time.
That said, we’re still in awful shape here, and the speed with which the U.K. has gone down is astonishing. Wile E. Coyote cartoons seemed too slapstick for the Brit sense of humor…
The US/UK comparison is incorrect. The UK does not have GSE’s buying mortgages from commercial banks. So the amount of mortgages in the US purchased by GSEs need to be added to the total of US Govt lending to US banks. This is because GSE debt is govt guaranteed. If Fannie and Freddie had ceased their secondary market business a year ago – then you could compare the emergency funds borrowed by banks in the two countries. An additional amount on the UK side is the Northen Rock guarantee.
wintermute-
is that really the case? fannie and freddie aren’t gov’t institutions, they are private, no? legally, there is no gov’t backing.
if that’s the case, they shouldn’t be counted. unless congress decides to take over their liabilities, ala northern rock.
there’s a difference between that and a mere guarantee, implicit or otherwise.
wintermute,
When the GSE paper was issued, it said in all its offering documents that it was not an obligation of the US government. I imagine that the paper sold in the last few weeks contains the same boilerplate.
Even thought Congress has given the Treasury broad authority to intervene, at this juncture, no support has been extended to the GSEs. The Congressional Budget Office estimated the cost as $25 billion or less (yes, I’d beg to differ, but I’m not an official body tasked to review the costs of various forms of legislation). Various people in comments have gone further and argued that the Treasury and OFHEO have no authority to act unless statutory levels are breached, which they say isn’t happening.
I think Paulson is trying to get away with either no announcement if the markets do not force his hand, or a first loss position that is less than a full faith and credit guarantee.
Foreign governments, per our latest post, would not be leery of buying GSE paper if the status were known. They harbor doubts that these moves are indeed tantamount to a full guarantee. The markets are quietly insistent that the US Do Something, but we still haven’t said what happens and under what circumstances. This is still an awfully big game of chicken.
That is a long way of saying once the form of the backup is known, we can make a determination, but right now, Fannie and Freddie are still private paper with a vague, yet to be formalized government promise floating around.
Perhaps more important, the comparison is meant to highlight the degree to which banks have become dependent on government liquidity facilities. The GSE paper was always eligible collateral.
The UK, with a mortgage crisis that started later than that of the US, now has a banking system that, if Ryan’s analysis is correct, is proportionately more dependent on central bank/Treasury support than the US’s is. By the time the GSE program is in place and we know the nature and extent of the support, we may be there.
But proportionately, if we take the $360 billion figure and gross is up 5x for the size of the US economy ($1.8 trillion) and back out the current liquidity support ($450-$500 billion, although it may be less, since the PDCF goes up and down a lot), you would need $1.3 trillion in support of some form for the GSEs to come to a comparable level. The estimates vary widely, but $1.3 trillion is markedly larger than any number on the table now.
I’d be truly astonished if the number is that high. For a start, the amount of securitisations structured for potential use in the facility is less than half of that. Secondly, while most banks are very tight lipped about the SLS, a couple of very big banks have told me they haven’t used it at all.
The Bank of England will be publishing data on the SLS in October, so we’ll find out then, at least.
Ginger Yellow,
Lloyds might not have touched it; can’t guess your other candidate and I’m not asking.
Bet the rest are fairly gunnelled.
Will just have to be ptient about the overall size until Oct.
To be fair, just because they haven’t yet (and I really can’t say which) doesn’t mean they won’t before the window closes. But it’s worth noting that the Bank of England liquidity is far, far more expensive than the ECB’s for equivalent assets.
so the banks have no money?
The UK banks are certainly in a mess. However they will recover by charging customers more & offering poorer service.