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| Bank cash plan 'not mortgage aid' | Bank cash plan 'not mortgage aid' |
| (about 3 hours later) | |
| The governor of the Bank of England, Mervyn King, has said the £50bn loan scheme for UK banks was not designed to "kick-start" the mortgage market. | The governor of the Bank of England, Mervyn King, has said the £50bn loan scheme for UK banks was not designed to "kick-start" the mortgage market. |
| He told the House of Commons Treasury Committee the loans were not a bail-out and were meant to get banks lending to each other to ease the credit crisis. | |
| Mr King blamed that crisis on banks who invested in complex financial products. | |
| He criticised managers, who did not understand the investments, but awarded bonuses that encouraged risk-taking. | |
| "The managers of the [banking] institutions will now know that in future, if they want to keep their jobs they will have to have better control over the design of those instruments," Mr King told the committee of MPs. | |
| Mr King said he believed that staff pay and bonuses should be more closely linked to the longer-term performance of their investments, rather than the short-term rise and fall. | |
| I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months Mervyn King, Bank of England governor Q&A: £50bn Bank plan | |
| "Banks have come to realise they are paying the price for having designed compensation packages that provide incentives that are not in the long-run interests of the banks themselves." | |
| Mr King said the complicated and risky financial instruments, which he says are at the root of the credit crisis, were "based on some very poor assumptions". | |
| Many of the world's largest banks have lost large amounts on these complex financial products, whose design meant investors underestimated or misunderstood the risks involved. | |
| He said those banks which decided not to invest in these instruments - which were being described as "innovative, exciting activities," - were "often pilloried for being boring". | |
| "We must make sure it doesn't happen again," Mr King said. | |
| "I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months," the governor said. | |
| Restoring confidence | Restoring confidence |
| Earlier this month, the Bank of England announced a plan to enable banks to swap potentially risky mortgage debts for secure government bonds in order to relieve a credit squeeze. | Earlier this month, the Bank of England announced a plan to enable banks to swap potentially risky mortgage debts for secure government bonds in order to relieve a credit squeeze. |
| Mr King said the most recent crisis was not down to a lack of funds in the market - so-called liquidity - but was a result of a lack of confidence that meant banks were unwilling to lend to each other. | Mr King said the most recent crisis was not down to a lack of funds in the market - so-called liquidity - but was a result of a lack of confidence that meant banks were unwilling to lend to each other. |
| As a result, banks have been restricting lending to homeowners. | |
| But the governor was keen to stress that the Bank of England's plan to loan £50bn was not designed to stimulate mortgage lending. | |
| Mr King said it would be a mistake to go back to where the mortgage market was a year ago, when loans were cheaper and easier to get. | |
| However, despite not being the target for the loan scheme, Mr King said that if successful, homeowners should benefit from the scheme down the line. | |
| "There is the need for an adjustment in the mortgage market," he said. | |
| "But I do think the improved confidence in the banking sector, which I think this scheme will eventually restore, will feed through to borrowers and we'll see the mortgage market operating on a more normal basis." | |
| Defending himself against an accusation from George Mudie MP that he lacked sympathy for struggling homeowners, the governor said, | Defending himself against an accusation from George Mudie MP that he lacked sympathy for struggling homeowners, the governor said, |
| "I am not in favour of attaching political objectives to central bank operations," Mr King said. | "I am not in favour of attaching political objectives to central bank operations," Mr King said. |
| Mortgage costs | Mortgage costs |
| Mr King had to field questions about whether the main measure of inflation, CPI, which the Monetary Policy Committee uses as a target for setting interest rates, accurately reflected the rising housing costs faced by homeowners. | Mr King had to field questions about whether the main measure of inflation, CPI, which the Monetary Policy Committee uses as a target for setting interest rates, accurately reflected the rising housing costs faced by homeowners. |
| Mr King said he said a change in how CPI was measured would be "desirable". | Mr King said he said a change in how CPI was measured would be "desirable". |
| "I would like to see CPI include house prices in some form," he told the committee of MPs. | "I would like to see CPI include house prices in some form," he told the committee of MPs. |
| The measure does not currently include mortgage costs, but does include rental prices. | The measure does not currently include mortgage costs, but does include rental prices. |