To stabilise financial system

With the global economic downturn intensifying, the UK government has announced a new 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 latest initiatives aim to address the current barriers to lending by: extending the drawdown window for new debt under the government’s credit guarantee scheme (CGS) which is designed to reduce the risks on lending between banks; establishing a new facility for asset backed securities; extending the maturity date for the Bank of England’s discount window facility which provides liquidity to the banking sector by allowing them to swap less liquid assets; and establishing a new Bank of England facility for purchasing high quality assets.

The initiatives also aim at offering capital and asset protection scheme for banks, with proposals for this to be coordinated internationally; and clarifying the regulatory approach to capital requirements, through an announcement by the Financial Services Authority.

The Treasury said that the government’s measures in October 2008 to recapitalise the banking system increased the capital ratios of the major banks and provided them with a buffer to withstand the current challenging economic conditions.

Over the past two months, the global financial and economic situation has continued to deteriorate. In particular, internationally, banks’ confidence to increase lending has been constrained by uncertainty about the value of past investments. Lending by foreign banks, non-bank institutions and smaller lenders for UK borrowers has reduced. The government is clear that meeting lending demand to otherwise creditworthy businesses, homeowners and consumers is essential for supporting economic recovery.