King admits Bank cannot solve mortgage crisis

Bank of England governor Mervyn King has admitted no form of regulation or special funding will solve the current mortgage lending crisis.

Speaking to the Treasury Select Committee today, King says financial market conditions are worsening and the banking system as a whole remains short of capital.

The Bank is expected next week to outline the permanent replacement to its Special Liquidity Scheme, which expires on 21 October. Under current terms, lenders have the ability to exchange mortgage securities in return for Treasury-backed gilts.

However, King says the new proposals “will not and can not” solve the shortage of lending finance.

“The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks,” he says.

“But it is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system – indeed it cannot do that. Only private savers or taxpayers via the government can provide such funds.

“So I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending.”

King also says he is likely to write another letter to the Chancellor next week on the high inflation.

“In the UK we face a difficult, but temporary, period during which inflation will remain high for a while and output growth at best weak,” he says.

“But provided we do not impede the required adjustment we will come through this temporary period and resume a path of normal economic growth with inflation close to target.”

Contact:
Hysni Kaso
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Hysni.Kaso@incisivemedia.com