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”.