A cautious approach: Bank of England governor Mervyn King.
The global credit crunch has highlighted just how far regulators and banks in some markets are willing to go to prop up the domestic financial system. However, clear differences are emerging between the United States and the United Kingdom when it comes to the extent of regulatory intervention—and those differences could have extreme implications.
But before it takes on some of the commercial banks’ mortgage assets, the BoE may want to heed the warning of ratings agency Standard & Poor’s, which has sounded a cautionary note about some of the liquidity tools that are being used to stimulate the US housing and mortgage markets. S&P warned that government-sponsored enterprises (GSEs) that provide liquidity to the secondary mortgage market posed “large contingent fiscal risks” that, if they translated into larger government debt, could damage the United States’ AAA credit rating.
In a statement S&P said, “In our view, US sovereign credit quality faces a bigger threat from weaker GSE credit quality than from Bear Stearns and other broker-dealers.”
While the ratings agency said the United States’ triple-A sovereign rating could support increasing contingent fiscal risks, it was only up to a point, and if a prolonged recession led to higher losses, then downward pressure on the rating could emerge.