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Five-year taxpayer help for banks

• Robert Peston
• 16 Dec 08, 08:23 AM

The Treasury quietly conceded yesterday that the crisis undermining banks' ability to borrow from each other and from financial institutions could last for five years.

In fact, it's likely that banks' ability to borrow on wholesale markets will never recover to the boom conditions that characterised the few years before the summer of 2007.

Either way, the Treasury is trying to help banks adjust to a prolonged funding drought by amending the terms of the it announced in October - which allows banks to purchase a guarantee from taxpayers to cover the risk of default on what they borrow from banks and money managers.

The Treasury has announced that this scheme will now run for five years, up from three years.

Which, as I say, rather implies an abandonment of the Micawberish notion that something would turn up and that banks would one day wake up to find that they weren't being shunned any longer by institutions with big deposits to place.

Also, following pressure from the banks and the Tories, the Treasury has also significantly reduced the fee payable to it for having taxpayers in effect lend money to the banks.

It has done this by excluding from the calculation of the risk premium payable to taxpayers the great surge in the perceived riskiness of banks that took place in September and October.

In effect, the Treasury has converted the Credit Guarantee Scheme from an insurance policy, which was designed to provide comfort to markets that banks wouldn't collapse for want of access to funding, into a , to replace the funds that have disappeared with the de facto closure of wholesale markets.

Or to put it another way, the scheme has been redesigned in the hope that it will now help banks to raise money for lending to all of us.

That represents a fairly substantial policy shift. And it's slightly odd that the Treasury has announced this in a whisper, through a parliamentary written answer made by Ian Pearson, a junior minister.

So far, banks have raised just 拢20bn from the scheme in its previous more expensive form. If the repricing means they now borrow the full 拢250bn on offer, as well they now might, taxpayers would be underpinning a good deal of banks' mainstream lending.

We, as taxpayers, would in effect have replaced the shrunken wholesale markets.

In respect of how the financial economy works, that's about as big a change as it's possible to imagine: so it's a shame, perhaps, to keep that quiet.

UPDATE, 09:16 AM: Bankers are, predictably, whining that the fee for raising money under the Credit Guarantee Scheme hasn't been cut enough.

And they are right that it won't allow them to raise money cheaply enough for them to be able to lend to us at the much reduced interest rates the government would like.

So there is still something of a contradiction between ministers' rhetoric about the need for banks to cut the interest rates on mortgages and loans to small business and their actions.

Even so, the CGS reforms represent a significant policy shift - and it won't be the last initiative by the Treasury to underwrite lending to financial and to non-financial companies.

Taxpayers are the new wholesale financial market.

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