CML news & views

Our recent response to the consultation on measures to promote financial stability and improve protection for depositors welcomed the steps taken recently by the Bank of England to bolster liquidity in financial markets. However, we urged the Bank to respond flexibly and innovatively at the earliest signs that its initiative is not having the desired effect. In those circumstances, it should be prepared to re-consider both the pricing of its special liquidity scheme and the range of institutions that can benefit from it. 

The main focus of our response to the joint consultation by the Treasury, the Bank and the Financial Services Authority was on financial stability. We believe it is better to maintain stability and prevent the failure of financial institutions, rather than improve the way in which financial sector deals with the fallout from failed institutions. 

We advocated support for an ambitious programme of work already begun by the European Commission. The Commission is looking at measures to:

• make capital markets more transparent and improve the way they work;
• improve standards of valuation, particularly for illiquid assets; and 
• reinforce risk management and the prudential structure of the banking sector.

We believe that in the short term it is important to focus on measures to re-establish more normal conditions in financial markets. We acknowledge that in the longer term, the authorities may want, for example, to explore ways of introducing greater standardisation to the structured finance market. But we believe that it is unrealistic to expect either to achieve this quickly or for it to produce a dramatic shift in investor sentiment. 

In the meantime, there is a risk that the impact of reduced credit availability on housing and job markets will reinforce consumer perceptions that financial circumstances are deteriorating. That could restrict their spending. But as it is consumer spending that has been driving the economy, there is the potential for economic growth to slow significantly, affecting the corporate sector.

It is possible that the current financial turmoil will also lead to a search for scapegoats in the form of expansionist lenders, unreliable credit rating agencies or faltering structured finance markets. But our response argues that it is important not to overlook the fact that - above all else - we are experiencing a cyclical adjustment, following a long period of strong and exceptionally positive expectations.