Author: Anita Hawser

GLOBAL

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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.

While central banks around the world have all pumped in additional liquidity to try to plug the gap left by the collapse of the interbank lending market, the US Federal Reserve went one step further when it purchased $29 billion of illiquid Bear Stearns’ assets as a sweetener for JPMorgan to then acquire the ailing investment bank. The UK government and the Bank of England, on the other hand, have been criticized for their more laissez-faire approach and only very recently have begun considering engineering a deal whereby the BoE would take over some of the mortgage loans on banks’ balance sheets to try to open up the money markets.

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.

Anita Hawser