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Will the bail-out help your finances?
By Rebecca Atkinson
At the end of last year, the Government announced a scheme - termed the banking bail-out - that it hoped would kick-start the economy by supporting banks during the downturn. It came at the same time as the Bank of England starting cutting interest rates in an attempt to reduce pressure on borrowers and businesses.
But despite these proactive measures, for most of us, little has changed. Mortgage borrowers continue to struggle with payment shock, rates on new loans have not come down significantly and house price falls continue with little sign of slowing. At the same time, savers are paying as headlines rates on fixed and instant access deals fall.
The economic outlook continues to look grim, with more job losses, businesses folding and a recession still very much on the horizon.
The Government has now unveiled a second scheme to help support banks, increase lending and, hopefully, revive the flagging economy. But will the measures announced by enough to beat the downturn and get banks lending again? And what impact will it have on borrowers, savers, Northern Rock and Royal Bank of Scotland customers?
The second banking bail-out
The logic behind this scheme is that such debt is hard to value, as banks are not currently able to sell it through the normal avenues, making it hard for them to know how much money they have on their balance sheets to lend. As a result, banks have been storing up their finances and restricted new lending.
The insurance scheme should encourage banks to increase their lending levels, as they have a Government assurance of how much money they can expect to reclaim from the debts.
A second measure announced by the Government is the launch of a guarantee scheme for asset backed securities, a move recommended by Sir James Crosby in his investigation into how best to support bank lending to individuals and businesses.
This scheme aims to help banks access funding from the wholesale funding markets, thus supporting new lending, by offering Treasury guarantees to high quality asset-backed securities, including mortgages as well as corporate and consumer debt. The aim behind this move, which will not commence until April 2009, is to re-open the wholesale money markets this enabling banks to increase their funding.
In addition, Northern Rock has agreed to ditch its plan to shrink its mortgage book by 60% and the Government has upped its stake in RBS to 70%.
Impact on economy
In a statement, the Treasury says: "With the global economic downturn intensifying in the past two months, the Government is announcing a comprehensive package designed to reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy."
The move has been long awaited by the industry, with many commentators repeatedly calling for Government help to restart the mortgage markets and support banks. Despite the Bank of England cutting interest rates from 5% in October to the historically low-rate of 1.5% in January, there has not been any significant evidence to suggest that this monetary policy is doing enough to boost lending and the economy.
The British Bankers' Association says the measures will improve banks' liquidity, which is key to the economic downturn.
However, despite the Government 'coming good' and announcing these new measures, not everyone is convinced they are enough.
Vicky Redwood, UK economist at Capital Economics, says while it is a significant step, there are no magic solutions to the downturn.
"These measures will take time to get off the ground. Only the bare bones of the schemes have been laid out, some of which will not be put in place until April. More importantly, even with the Government absorbing some of the losses on their most toxic assets, banks face huge amounts of recession-related losses in the next few years," she warns.
Redwood also criticises the measures as failing to tackle "the heart of the problem"; namely, that banks do not want to lend during a recession. With losses still hanging over their heads, banks may be tempted to cling onto their capital and shore up their finances, rather than up their lending levels immediately.
"It is clear that the Government has realised that the banking system will not start functioning properly again without more state intervention. Less clear is whether these measures, on their own, will be enough to kick-start lending."
Impact on borrowers
But will the measures achieve these aims?
The Council of Mortgage Lenders (CML), which has been calling for Government initiatives to help banks cope with "bad" debts for more than a year, is hopeful.
It believes the Government guarantees should go some way to help to restart the securitisation market, allowing banks to sell mortgage and other debts to investors and raise funding for new lending.
Michael Coogan, director general of the CML, says: "At long last, the Government has announced a comprehensive and co-ordinated package of measures sufficiently large in scale to have an impact on improving the flow of new lending."
But Coogan adds that it is too soon to accurately assess the impact on lending levels: "As always, the devil will be in the detail and there will be a great deal to work through. No doubt, there may still be disproportionate impacts on some firms or some sectors from the latest measures, but overall this is a helpful package that we think is much more likely to help lending flow more effectively again than the steps that have been taken to date."
Certainly, borrowers should not expect to see much difference overnight.
A lot depends on how banks react to the measures.
David Breger, partner at HW Fisher chartered accountants, says: "On paper, this latest rescue package is good news for business and good news for homeowners and borrowers. The question, as ever, is will the banks pay attention to it, and if they do, how long before companies and consumers begin to benefit? Time is everything at the moment."
And Redwood says: "It is clear that the Government has realised that the banking system will not start functioning properly again without more state intervention. Less clear is whether these measures, on their own, will be enough to kick-start lending."
She predicts that the Government will need to go further over the coming months, potentially by nationalising more banks and setting lending targets for banks.
The fact that the guarantee schemes are not available to all mortgage lenders (with non-deposit taking firms and subprime lenders excluded) should also be a problem, says the CML.
Impact on savers
Although savings rates have fallen dramatically since October, from highs of 7% to average rates around the 1% mark, experts said that a need for funding would continue to underpin some rates.
But with the Government measures designed to enable banks to start buying funding from the wholesale markets again, will this discourage firms from trying to draw in savers?
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, says: "If this strategy is successful, it will offer lenders the opportunity to use wholesale funds to help supplement saver's deposits as a source of finance for new mortgage loans."
So, will we continue to see some savings providers offering rates above the Bank of England's base rate or are savers doomed to historically low returns from their nest eggs?
Michelle Slade, spokeswoman at data provider Moneyfacts, says there is now the potential for savings rates to come down.
"Interest rates on savings have been kept artificially high over the past year despite low Bank of England interest rates, because of funding restrictions for lenders," she explains. "This potentially could now change but for smaller building societies and banks with a large number of savings customers, it shouldn't make too much difference. These players won't want to discourage their customers so they are unlikely to cut rates too much."
Northern Rock customers
Northern Rock's original plans was to reduce its mortgage book by 60%, partly by restricting new lending and also by encouraging mortgage customers being actively encourage to move their loans to other lenders once their fixed introductory periods have expired. It did this by setting up a referral deal with Lloyds TSB and also by giving borrowers access to a panel of brokers to help them find a remortgage elsewhere.
Northern Rock says this policy has enabled it to pay off its Government loan ahead of schedule. However, it now plans to slow redemptions and, therefore, repay the loan at a slower rate.
The impact on borrowers remains to be seen, although at this stage it does look positive for people with Northern Rock. The bank is carrying out a strategic review into how it can reduce the number of redemptions and more details are likely to be announced once this is concluded.
Jaqualyn Gill, a spokeswoman for Northern Rock, was unable to give a date when the review will be concluded but it is likely to be a question of weeks rather than months.
Until then, Gill says Northern Rock will "less actively" encourage borrowers to move away, although its existing deals with Lloyds TSB and its panel of brokers remains in place.
The bank's current standard variable rate will change to 5.09% on 1 February, but Gill says this is under review and could potentially come down in a move to encourage borrowers to stay with the bank. In comparison, Cheltenham & Gloucester's SVR is 3.5%, while Abbey's is 4.94% and Halifax's in 4.5%.
"We need to look at our SVR but once the review is concluded we will see more details emerge on how we plan to slow down redemptions," she adds.
If the SVR is reduced, then this will be a big help for Northern Rock's 100% mortgage borrowers, who are unlikely to be offer mortgages elsewhere.
The plans should not have any impact on savers, and borrowers are urged to continue repaying their loans as usual.
Royal Bank of Scotland customers
In return, RBS is expected to increase its lending to homeowners and businesses by £6 billion over the next 12 months. The move came after RBS warned it expects losses from bad debts and write-downs to hit £28 billion when it publishes its financial results on 26 February. Challenging credit and market conditions in the last quarter of 2008 are likely to up the financial damage by a further £8 billion, the group added.
The changes shouldn't have too much impact on the bank's customers. On one hand, the fact that the Treasury now has a 70% stake in the firm should indicate that savers' money is safe as the Government is unlikely to let it 'go to the wall'.
At the same time, the fact that one condition of the change is that RBS increases its lending.
Melanie Bien, associate director at mortgage broker Savilles Private Finance, says that, although it remains to be seen whether banks will increase their lending levels, RBS is committed to increasing lending by £6 billion this year.
This should mean lower rates on mortgages, and potentially loans for people without large deposits.
But the impending recession is still an issue.
"Part of the problem is that the current climate of job losses and falling house prices should make banks more cautious about lending, especially to businesses," Bien explains. "How they balance their own need to reduce risk with the Government's orders to increase lending remains to be seen."
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