Cicero Policy Briefer

Issue 27, August 2008

Staring into the abyss: Analysing the Crosby Review

By John Rowland

“The leitmotif of the report is that banks are unlikely to increase their appetite for risk any time soon, and there might not be much anyone can do
about it”

Since Sir James Crosby was asked to peer into the abyss that is the wholesale mortgage funding market back in April he has, with a small team of HM Treasury officials, been doing the rounds. So far they have seen 30 different organisations—from banks to brokers to the FSA.

However, for all the gnashing of teeth he must have heard, mortgage lenders looking for a tub-thumping case for Government intervention to breathe some life into the UK’s mortgages will be disappointed by this interim analysis.

It was always unlikely that he was going to strongly push for one solution or another before his final report, due at the same time as the Pre-Budget Report. Nevertheless, one can’t help that feel that a vein of scepticism runs through the report—the leitmotif being that the banks are unlikely to increase their appetite for risk any time soon, and there might not be much anyone can do about it. In short, unless you have good, reliable earnings and a hefty deposit, a mortgage is going to be difficult to get over the next couple of years whatever the Government does.

However, he has given some indication as to what is on and off the table. Unsurprisingly, out are any form of US-style home loans agencies along the lines of Fannie Mae and Freddie Mac. On the table is the possibility of Government guarantees—on commercial terms—of the principal and interest on the high-grade tranches of newly issued securities. Measures around greater transparency and standardisation are also welcomed, though Crosby argues that they will not do much on their own. The team will continue to engage with market participants such as the Council of Mortgage Lenders (CML) and the European Securitisation Forum (ESF) on their initiatives too. The CML has advocated, for example, a repo scheme for RMBS.

Sir James will use the summer to evaluate the options for action “with all urgency”. However, don’t get too excited. He signs off his letter to the Chancellor with a telling rejoinder: “I may yet recommend that the Government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve.”

Doing nothing is certainly an option—but at what cost to the wider economy?

John Rowland can be contacted on +44 (0)20 7665 9539 or click here to email.